##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 26, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-11655
 HearUSA, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    22-2748248(State of Other Jurisdiction of 
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, and accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange act. (Check one):
 Large accelerated filero
    
    Accelerated filero
    
    Non-accelerated filero
    
    Smaller Reporting Company 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 6, 2009, 44,362,806 shares of the Registrants Common Stock and 493,043 exchangeable
shares of HEARx Canada, Inc. were outstanding.




---



##### 



INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets
September 26, 2009 and December 27, 2008
    
    
    3Consolidated Statements of Operations
Nine months ended September 26, 2009 and September 27, 2008
    
    
    4Consolidated Statements of Operations
Three months ended September 26, 2009 and September 27, 2008
    
    
    5Consolidated Statements of Cash Flows
Nine months ended September 26, 2009 and September 27, 2008
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATIONItem 6. Exhibits
    
    
    41Signatures
    
    
    43Exhibit 10.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1




---



##### Table of Contents



Part I  Financial Information
 
 Item 1. Financial Statements
 HearUSA, Inc.
 
 Consolidated Balance Sheets
 (unaudited)
 September 26,
    
    
    December 27,2009
    
    
    2008(Dollars in thousands, except forpar values)ASSETS (Notes 2 and 4)Current assetsCash and cash equivalents (Note 7)
    
    $
    8,436
    
    
    $
    3,553Short-term marketable securities (Note 7)
    
    
    6,406
    
    
    
    Accounts and notes receivable, less allowance for
doubtful accounts of $644 and $506
    
    
    5,628
    
    
    
    7,371Inventories
    
    
    1,882
    
    
    
    1,682Prepaid expenses and other
    
    
    797
    
    
    
    502Total current assets
    
    
    23,149
    
    
    
    13,108Property and equipment, net (Note 4)
    
    
    4,150
    
    
    
    4,876Goodwill (Notes 2,3 and 4)
    
    
    51,309
    
    
    
    65,953Intangible assets, net (Notes 2 and 4)
    
    
    12,997
    
    
    
    15,630Deposits and other
    
    
    770
    
    
    
    810Restricted cash and cash equivalents
    
    
    3,225
    
    
    
    224Total Assets
    
    $
    95,600
    
    
    $
    100,601LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    9,885
    
    
    $
    5,011Accrued expenses
    
    
    3,217
    
    
    
    3,208Accrued salaries and other compensation
    
    
    3,103
    
    
    
    3,713Current maturities of long-term debt
    
    
    6,372
    
    
    
    6,915Income taxes payable
    
    
    1,870
    
    
    
    Dividends payable
    
    
    35
    
    
    
    34Total current liabilities
    
    
    24,482
    
    
    
    18,881Long-term debt (Notes 2,4 and 7)
    
    
    37,308
    
    
    
    49,099Deferred income taxes
    
    
    7,085
    
    
    
    7,284Total long-term liabilities
    
    
    44,393
    
    
    
    56,383Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity (Note 8)Preferred stock (aggregate liquidation preference $2,330, $1 par,
7,500,000 shares authorized)Series H Junior Participating (none outstanding)
    
    
    
    
    
    
    Series J (233 shares outstanding)
    
    
    
    
    
    
    Total preferred stock
    
    
    
    
    
    
    Common stock: $.10 par; 75,000,000 shares authorized
44,880,045 and 44,828,384 shares issued
    
    
    4,488
    
    
    
    4,483Additional paid-in capital
    
    
    137,577
    
    
    
    136,924Accumulated deficit
    
    
    (114,810
    )
    
    
    (116,360
    )Accumulated other comprehensive income
    
    
    
    
    
    
    1,249Treasury stock, at cost: 523,662 common shares
    
    
    (2,485
    )
    
    
    (2,485
    )Noncontrolling interest
    
    
    1,955
    
    
    
    1,526Total Stockholders equity
    
    
    26,725
    
    
    
    25,337Total Liabilities and Stockholders Equity
    
    $
    95,600
    
    
    $
    100,601
 See accompanying notes to consolidated financial statements
  3




---



##### Table of Contents



HearUSA, Inc.
 
 Consolidated Statements of Operations
 Nine months ended September 26, 2009 and September 27, 2008
 (unaudited)
 September 26,
    
    
    September 27,2009
    
    
    2008(Dollars in thousands, except pershare amounts)Net revenuesHearing aids and other products
    
    $
    61,172
    
    
    $
    69,241Services
    
    
    6,043
    
    
    
    5,389Total net revenues
    
    
    67,215
    
    
    
    74,630Operating costs and expensesHearing aids and other products (Note 4)
    
    
    14,998
    
    
    
    18,661Services
    
    
    1,325
    
    
    
    1,627Total cost of products sold and services excluding depreciation and amortization
    
    
    16,323
    
    
    
    20,288Center operating expenses
    
    
    33,510
    
    
    
    38,237General and administrative expenses (Note 9)
    
    
    11,387
    
    
    
    11,565Depreciation and amortization
    
    
    1,731
    
    
    
    1,544Total operating costs and expenses
    
    
    62,951
    
    
    
    71,634Income from operations
    
    
    4,264
    
    
    
    2,996Non-operating income (expenses)Gain on foreign exchange
    
    
    499
    
    
    
    Interest income
    
    
    6
    
    
    
    29Interest expense (Notes 3, 4 and 5)
    
    
    (3,728
    )
    
    
    (3,996
    )Income (loss) from continuing operations before income tax expense
    
    
    1,041
    
    
    
    (971
    )Income tax expense
    
    
    (630
    )
    
    
    (620
    )Income (loss) from continuing operations
    
    
    411
    
    
    
    (1,591
    )Discontinued operations (Note 2)Income from discontinued operations, net of income tax expense (benefit) of $(261) and $196
    
    
    1,144
    
    
    
    2,356Gain on sale of discontinued operations
    
    
    2,158
    
    
    
    Income tax expense on sale of discontinued operations
    
    
    (1,632
    )
    
    
    Income from discontinued operations
    
    
    1,670
    
    
    
    2,356Net income
    
    
    2,081
    
    
    
    765Net income attributable to noncontrolling interest
    
    
    (429
    )
    
    
    (1,174
    )Net income (loss) attributable to controlling interest
    
    
    1,652
    
    
    
    (409
    )Dividends on preferred stock
    
    
    (102
    )
    
    
    (104
    )Net income (loss) attributable to common stockholders
    
    $
    1,550
    
    
    $
    (513
    )Income (loss) from continuing operations attributable to common stockholders per common
share  basic
    
    $
    (0.00
    )
    
    $
    (0.07
    )Income (loss) from continuing operations attributable to common stockholders per common
share  diluted
    
    $
    (0.00
    )
    
    $
    (0.07
    )Net income (loss) attributable to common stockholders per common share  basic
    
    $
    0.03
    
    
    $
    (0.01
    )Net income (loss) attributable to common stockholders per common share  diluted
    
    $
    0.03
    
    
    $
    (0.01
    )Weighted average number of shares of common stock outstanding  basic
    
    
    44,831
    
    
    
    38,501Weighted average number of shares of common stock outstanding  diluted
    
    
    45,416
    
    
    
    38,501
 See accompanying notes to consolidated financial statements
  4




---



##### Table of Contents



HearUSA, Inc.
 
 Consolidated Statements of Operations
 Three months ended September 26, 2009 and September 27, 2008
 (unaudited)
 September 26,
    
    
    September 27,2009
    
    
    2008(Dollars in thousands, except pershare amounts)Net revenuesHearing aids and other products
    
    $
    19,616
    
    
    $
    22,716Services
    
    
    2,212
    
    
    
    1,813Total net revenues
    
    
    21,828
    
    
    
    24,529Operating costs and expensesHearing aids and other products (Note 4)
    
    
    4,543
    
    
    
    5,963Services
    
    
    441
    
    
    
    571Total cost of products sold and services excluding depreciation and amortization
    
    
    4,984
    
    
    
    6,534Center operating expenses
    
    
    10,811
    
    
    
    12,781General and administrative expenses (Note 9)
    
    
    3,694
    
    
    
    3,217Depreciation and amortization
    
    
    593
    
    
    
    520Total operating costs and expenses
    
    
    20,082
    
    
    
    23,052Income from operations
    
    
    1,746
    
    
    
    1,477Non-operating income (expenses)Gain on foreign exchange
    
    
    99
    
    
    
    Interest income
    
    
    4
    
    
    
    7Interest expense (Notes 3, 4 and 5)
    
    
    (1,137
    )
    
    
    (1,548
    )Income (loss) from continuing operations before income tax expense and discontinued
operations
    
    
    712
    
    
    
    (64
    )Income tax expense
    
    
    (210
    )
    
    
    (214
    )Income (loss) from continuing operations
    
    
    502
    
    
    
    (278
    )Discontinued operations (Note 2)Income (loss) from discontinued operations, net of income tax expense of $82,000 in 2008
    
    
    (15
    )
    
    
    720Gain on sale of discontinued operations
    
    
    529
    
    
    
    Income tax expense on gain on sale of discontinued operations
    
    
    (87
    )
    
    
    Income from discontinued operations
    
    
    427
    
    
    
    720Net income
    
    
    929
    
    
    
    442Net income attributable to noncontrolling interest
    
    
    (182
    )
    
    
    (482
    )Net income (loss) attributable to controlling interest
    
    
    747
    
    
    
    (40
    )Dividends on preferred stock
    
    
    (34
    )
    
    
    (35
    )Net income (loss) attributable to common stockholders
    
    $
    713
    
    
    $
    (75
    )Income (loss) from continuing operations attributable to common stockholders per common
share  basic
    
    $
    0.01
    
    
    $
    (0.02
    )Income (loss) from continuing operations attributable to common stockholders per common
share  diluted
    
    $
    0.01
    
    
    $
    (0.02
    )Net income (loss) attributable to common stockholders per common share  basic
    
    $
    0.02
    
    
    $
    (0.00
    )Net income (loss) attributable to common stockholders per common share  diluted
    
    $
    0.02
    
    
    $
    (0.00
    )Weighted average number of shares of common stock outstanding  basic
    
    
    44,838
    
    
    
    38,408Weighted average number of shares of common stock outstanding  diluted
    
    
    45,810
    
    
    
    38,408
 See accompanying notes to consolidated financial statements
  5




---



##### Table of Contents



HearUSA, Inc.
 
 Consolidated Statements of Cash Flows
 Nine Months Ended September 26, 2009 and September 27, 2008
 (unaudited)
 September 26,
    
    
    September 27,2009
    
    
    2008(Dollars in thousands)Cash flows from operating activitiesNet income
    
    $
    2,081
    
    
    $
    765Adjustments to reconcile net income to net cash provided by operating activities:Debt discount amortization
    
    
    
    
    
    
    192Depreciation and amortization
    
    
    1,865
    
    
    
    1,922Gain on foreign exchange
    
    
    (499
    )
    
    
    Gain on sale of assets
    
    
    (526
    )
    
    
    Employee and director stock-based compensation
    
    
    623
    
    
    
    607Provision for doubtful accounts
    
    
    354
    
    
    
    396Deferred income tax expense
    
    
    630
    
    
    
    815Interest on discounted notes payable
    
    
    252
    
    
    
    355Interest on discounted long-term contractual commitment to AARP
    
    
    
    
    
    
    260Principal payments on long-term debt made through rebate credits
    
    
    (2,485
    )
    
    
    (2,996
    )Other
    
    
    21
    
    
    
    (97
    )(Increase) decrease in:Accounts and notes receivable
    
    
    (354
    )
    
    
    (453
    )Inventories
    
    
    (352
    )
    
    
    (342
    )Prepaid expenses and other
    
    
    (130
    )
    
    
    (44
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    3,805
    
    
    
    5,927Net cash provided by operating activities
    
    
    5,285
    
    
    
    7,307Cash flows from investing activitiesPurchase of property and equipment including software development
    
    
    (681
    )
    
    
    (1,192
    )Purchase of intangible assets
    
    
    (208
    )
    
    
    Net proceeds from sale of Canada assets
    
    
    22,747
    
    
    
    Net purchases of short-term marketable securities
    
    
    (6,402
    )
    
    
    Letter of credit  restricted cash
    
    
    (3,000
    )
    
    
    Business acquisitions
    
    
    (1,313
    )
    
    
    (3,551
    )Net cash provided by (used in) investing activities
    
    
    11,143
    
    
    
    (4,743
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    
    
    
    
    3,408Principal payments on long-term debt
    
    
    (3,520
    )
    
    
    (3,620
    )Principal payments on Siemens debt
    
    
    (8,097
    )
    
    
    Principal payments on subordinated notes
    
    
    
    
    
    
    (1,540
    )Proceeds from the exercise of employee options
    
    
    13
    
    
    
    146Dividends paid on preferred stock
    
    
    (102
    )
    
    
    (104
    )Dividends paid to noncontrolling interest
    
    
    
    
    
    
    (759
    )Net cash used in financing activities
    
    
    (11,706
    )
    
    
    (2,469
    )Effects of exchange rate changes on cash
    
    
    161
    
    
    
    82Net increase in cash and cash equivalents
    
    
    4,883
    
    
    
    177Cash and cash equivalents at the beginning of period
    
    
    3,553
    
    
    
    3,369Cash and cash equivalents at the end of period
    
    $
    8,436
    
    
    $
    3,546Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    549
    
    
    $
    647Supplemental schedule of non-cash investing and financing activities:Principal payments on long-term debt made through rebate credits
    
    $
    (2,485
    )
    
    $
    (2,996
    )Issuance of notes payable in exchange for business acquisitions
    
    $
    1,217
    
    
    $
    2,976Issuance of capital lease in exchange for property and equipment
    
    $
    357
    
    
    $
    223Conversion of accounts payable to notes payable
    
    $
    
    
    
    $
    2,843Long-term contractual commitment to AARP in exchange for intellectual property
    
    $
    
    
    
    $
    19,533Purchase of equipment with volume discount credit
    
    $
    
    
    
    $
    200
 See accompanying notes to consolidated financial statements
  6




---



##### Table of Contents



1. Description of the Company and Summary of Significant Accounting Policies
 The Company
  Basis of Consolidation
    Short term marketable securities
   7




---



##### Table of Contents



Net income (loss) attributable to controlling interest per common share
   Comprehensive income (loss)
   Nine Months Ended
    
    
    Three Months EndedSeptember 26,
    
    
    September 27,
    
    
    September 26,
    
    
    September  27,Dollars in thousands
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net income for the period
    
    $
    2,081
    
    
    $
    765
    
    
    $
    929
    
    
    $
    442Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    89
    
    
    
    (183
    )
    
    
    
    
    
    
    (319
    )Comprehensive income (loss) for the period
    
    $
    2,170
    
    
    $
    582
    
    
    $
    929
    
    
    $
    123
 Commitments
    8




---



##### Table of Contents



(a)
    
    All Company owned centers and network providers in Florida and New Jersey by
the end of calendar 2009.
 (b)
    
    Company network providers in Illinois, Michigan, Pennsylvania, Indiana,
Massachusetts, Arizona, Wisconsin, Washington, California, Georgia, Maryland, North
Carolina, Virginia, Missouri, New York, Texas and Ohio by the end of calendar 2010.
 (c)
    
    A combination of Company owned centers and network providers in all fifty
states, the District of Columbia, and the five U.S. Territories by the end of 2011.
      9




---



##### Table of Contents



2. Discontinued Operations
         10




---



##### Table of Contents



For the Nine Months Ended
    
    
    For the Three Months EndedSeptember 26,
    
    
    September 27,
    
    
    September 26,
    
    
    September 27,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    4,533
    
    
    $
    12,900
    
    
    $
    (15
    )
    
    $
    4,187Cost and expenses
    
    
    3,650
    
    
    
    10,348
    
    
    
    
    
    
    
    3,385Income (loss) before provision of income taxes
    
    $
    883
    
    
    $
    2,552
    
    
    $
    (15
    )
    
    $
    802Income tax expense (benefit)
    
    
    (261
    )
    
    
    196
    
    
    
    
    
    
    
    82Income (loss) from discontinued operations
    
    $
    1,144
    
    
    $
    2,356
    
    
    $
    (15
    )
    
    $
    720Gain on sale of discontinued operations, net
of applicable tax
    
    $
    526
    
    
    $
    
    
    
    $
    442
    
    
    $
    Income from discontinued operations  basic
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    0.02Income from discontinued operations  diluted
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    0.02
  Current Assets
    
    $
    1,918Property and equipment
    
    
    473Goodwill
    
    
    16,810Intangible assets, net
    
    
    2,732Current liabilities
    
    
    (105
    )Foreign currency translation adjustment
    
    
    (1,338
    )Net assets sold in or allocated to Asset Sale
    
    $
    20,490
 3. Business Acquisitions and Goodwill Impairment
   11




---



##### Table of Contents



12




---



##### Table of Contents




    
    The Companys stock is thinly traded;
    
    The decline in the Companys stock price during 2008 is not directly correlated to a
change in the overall operating performance of the Company; and
    
    Previously unseen pressures are in place given the global financial and economic crisis.
   4. Long-term Debt
  September 26,
    
    
    December 27,Dollars in thousands
    
    2009
    
    
    2008Credit Facility payable to SiemensTranche B
    
    $
    4,387
    
    
    $
    5,552Tranche C
    
    
    31,697
    
    
    
    41,109Total Credit Facility payable to Siemens
    
    
    36,084
    
    
    
    46,661Notes payable from business acquisitions and other
    
    
    7,596
    
    
    
    9,35343,680
    
    
    
    56,014Less current maturities
    
    
    6,372
    
    
    
    6,915$
    37,308
    
    
    $
    49,099
  13




---



##### Table of Contents



For the twelve months ended September:2010
    
    $
    6,3722011
    
    
    4,9692012
    
    
    3,7622013
    
    
    2,6862014 and thereafter
    
    
    25,891
   Amended Credit Agreement
    14




---



##### Table of Contents



Amended Supply Agreement
     Calculation of Pro forma Rebates to HearUSA when at least 90% ofUnits
Purchased in the U.S. are from Siemens (1)Quarterly
Siemens Unit Purchases Compared to Prior Years Comparable Quarters90%  but < 95%
    

    
    95%  to 100%
    

    
    
    > 100% < 125%
    
    
    125% and >Acquisition rebate (2)
    
    $

    65/ unit
    
    
    $

    65/ unit
    

    
    $

    65/ unit

    
    
    $

    65/ unitPlus
    
    
    Plus
    
    
    Plus
    
    
    PlusNotes payable rebate
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    500,000Additional volume rebate
    
    
    
    
    
    
    156,250
    
    
    
    312,500
    
    
    
    468,750Interest forgiveness rebate (3)
    
    
    1,187,500
    
    
    
    1,187,500
    
    
    
    1,187,500
    
    
    
    1,187,500$
    1,687,500
    
    
    $
    1,843,750
    
    
    $
    2,000,000
    
    
    $
    2,156,250
 (1)
    
    Calculated using trailing twelve month units purchased by the Company(2)
    
    Siemens units purchased by acquired businesses ($65 per unit)(3)
    
    Assuming the first $50 million portion of the line of credit is fully utilized  15




---



##### Table of Contents



Nine Months Ended
    
    
    Three Months EndedSeptember 26,
    
    
    September 27,
    
    
    September 26,
    
    
    September 27,Dollars in thousands
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Portion applied
against quarterly
principal payments
    
    $
    2,485
    
    
    $
    2,996
    
    
    $
    825
    
    
    $
    1,017Portion applied
against quarterly
interest payments
    
    
    2,954
    
    
    
    2,104
    
    
    
    861
    
    
    
    716$
    5,439
    
    
    $
    5,100
    
    
    $
    1,686
    
    
    $
    1,733
  Amended Investor Rights Agreement
  
    
    Resale registration rights covering the 6.4 million shares of common stock acquired by
Siemens on December 23, 2008 under the Siemens Purchase Agreement. The Company completed
the registration of these shares for resale in the second quarter of 2009.
 
    
    Certain rights of first refusal in the event the Company chooses to issue equity or if
there is a change of control transaction involving a person in the hearing aid industry
for a period of 18 months following the December 23, 2008 amendment. Thereafter Siemens
will have a more limited right of first refusal and preemptive rights for the term of the
agreement.
 
    
    The rights to have a representative of Siemens attend meetings of the Board of
Directors of the Company as a nonvoting observer.
  Notes payable from business acquisitions and other
   16




---



##### Table of Contents



5. Subordinated Notes and Warrants
   6. Noncontrolling Interest
   Amount(thousands)Balance at December 28, 2008
    
    $
    1,526Joint venture earnings allocable to joint venture partners
    
    
    429Dividends to joint venture partners
    
    
    Balance at September 26, 2009
    
    $
    1,955
 7. Fair Value
    Level 1
    
    Quoted prices (unadjusted) in active markets for identical assets or liabilities;Level 2
    
    Inputs other than quoted prices included in Level 1 that are either directly or
indirectly observable;Level 3
    
    Unobservable inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that
market participants would use in pricing.
  17




---



##### Table of Contents



Fair Value
Measurements
at Reporting
Date UsingQuoted Price inActive MarketsTotal as of
    
    
    for IdenticalSeptember 26,
    
    
    AssetsDescription
    
    2009
    
    
    (Level 1)Short-term
marketable
securities
    
    $
    6,406
    
    
    $
    6,406
    8. Stockholders Equity
 Common Stock
  9. Stock-based Compensation
    18




---



##### Table of Contents



Nine Months EndedSeptember 26, 2009Risk free interest rate
    
    2.78% to 3.47%Expected life in years
    
    
    10Expected volatility
    
    84% to 85%Weighted average exercise price
    
    $0.53 to $1.17
   Stock-based payment award activity
  Weighted
AverageRemainingWeighted
    
    
    ContractualAverage
    
    
    Term
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    (in years)
    
    
    Intrinsic ValueOutstanding at December 27, 2008
    
    
    5,356
    
    
    $
    1.30
    
    
    
    
    
    
    
    Granted
    
    
    1,060
    
    
    
    0.63Exercised
    
    
    (19
    )
    
    
    0.67
    
    
    
    
    
    
    $
    11Forfeited/expired/cancelled
    
    
    (209
    )
    
    
    1.70
    
    
    
    
    
    
    
    Outstanding at September 26, 2009
    
    
    6,188
    
    
    $
    1.17
    
    
    
    6.09
    
    
    $
    1,622Exercisable at September 26, 2009
    
    
    4,145
    
    
    $
    1.22
    
    
    
    4.63
    
    
    $
    963
  19




---



##### Table of Contents



WeightedAverageGrant-DateShares
    
    
    Fair(in thousands)
    
    
    ValueNon-vested at December 27, 2008
    
    
    1,552
    
    
    $
    1.59Granted
    
    
    1,060
    
    
    $
    0.53Vested
    
    
    (509
    )
    
    $
    1.59Forfeited unvested
    
    
    (60
    )
    
    $
    1.70Non-vested at September 26, 2009
    
    
    2,043
    
    
    $
    1.09
 Restricted stock units
    Service-based
    
    
    Performance-basedRestricted Stock Units (1)
    
    
    Restricted Stock Units (1)Outstanding at December 27, 2008
    
    
    136,500
    
    
    
    230,333Awarded
    
    
    
    
    
    
    255,000Vested
    
    
    (45,500
    )
    
    
    Forfeited
    
    
    
    
    
    
    (230,333
    )Outstanding at September 26, 2009
    
    
    91,000
    
    
    
    255,000
 (1)
    
    Each stock unit represents the fair market value of one share of common stock.   20




---



##### Table of Contents



10. Segments
   Dollars in thousands
    
    Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalHearing aids and other products revenues9 months ended September 26, 2009
    
    $
    61,112
    
    
    $
    60
    
    
    
    
    
    
    
    
    
    
    $
    61,1729 months ended September 27, 2008
    
    $
    69,161
    
    
    $
    80
    
    
    
    
    
    
    
    
    
    
    $
    69,241Service revenues9 months ended September 26, 2009
    
    $
    3,730
    
    
    $
    
    
    
    $
    1,841
    
    
    $
    472
    
    
    $
    6,0439 months ended September 27, 2008
    
    $
    3,895
    
    
    $
    
    
    
    $
    1,494
    
    
    
    
    
    
    $
    5,389Income (loss) from operations9 months ended September 26, 2009
    
    $
    14,875
    
    
    $
    (51
    )
    
    $
    829
    
    
    $
    (11,389
    )
    
    $
    4,2649 months ended September 27, 2008
    
    $
    14,155
    
    
    $
    (115
    )
    
    $
    850
    
    
    $
    (11,894
    )
    
    $
    2,9969 months ended September 26, 2009Depreciation and
amortization
    
    $
    1,257
    
    
    
    
    
    
    $
    
    
    
    $
    474
    
    
    $
    1,731Total assets
    
    $
    66,398
    
    
    
    
    
    
    $
    919
    
    
    $
    28,283
    
    
    $
    95,600Capital expenditures
    
    $
    509
    
    
    
    
    
    
    
    
    
    
    $
    172
    
    
    $
    6819 months ended September 27, 2008Depreciation and
amortization
    
    $
    1,591
    
    
    
    
    
    
    $
    
    
    
    $
    331
    
    
    $
    1,922Total assets
    
    $
    67,963
    
    
    
    
    
    
    $
    20,193
    
    
    $
    38,066
    
    
    $
    126,222Capital expenditures
    
    $
    1,080
    
    
    
    
    
    
    
    
    
    
    $
    112
    
    
    $
    1,192
  21




---



##### Table of Contents



Nine months endedSeptember 26,
    
    
    September 27,2009
    
    
    2008Hearing aid revenues
    
    
    97.1
    %
    
    
    97.5
    %Other products revenues
    
    
    2.9
    %
    
    
    2.5
    %
  Nine months endedSeptember 26,
    
    
    September 27,2009
    
    
    2008Hearing aid repairs
    
    
    42.8
    %
    
    
    46.8
    %Testing and other income
    
    
    57.2
    %
    
    
    53.2
    %
  Nine months endedSeptember 26,
    
    
    September 27,Dollars in thousands
    
    2009
    
    
    2008Contract service revenue on Canadian support agreement
    
    $
    (472
    )
    
    $
    General and administrative expense
    
    
    11,387
    
    
    
    11,565Corporate depreciation and amortization
    
    
    474
    
    
    
    331Corporate loss from operations
    
    $
    11,389
    
    
    $
    11,894
 RECENT ACCOUNTING PRONOUNCEMENTS
  22




---



##### Table of Contents



Generally Accepted Accounting
Principles
 Measuring Liabilities
at Fair Value
 Multiple-Deliverable
Revenue Arrangements, a consensus of the FASB Emerging Issues Task
Force
  23




---



##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 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. 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. The forward-looking statements in this Form 10-Q are based on current
expectations, estimates, forecasts and projections about the industry and markets in which we
operate and managements beliefs and assumptions. Any statements that are not statements of
historical fact should be considered forward-looking statements and should be read in conjunction
with our consolidated financial statements and notes to the consolidated financial statements
included in this report. The statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict, including those risks
described in this report and in the Companys annual report on Form 10-K for fiscal 2008 filed with
the Securities and Exchange Commission.
 RESULTS OF OPERATIONS
 For the three months ended September 26, 2009 compared to the three months ended September 27,
2008
 Revenues
  2009
    
    
    2008
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    19,616
    
    
    $
    22,716
    
    
    $
    (3,100
    )
    
    
    (13.6
    )%Services
    
    
    2,212
    
    
    
    1,813
    
    
    
    399
    
    
    
    22.0
    %Total net revenues
    
    $
    21,828
    
    
    $
    24,529
    
    
    $
    (2,701
    )
    
    
    (11.0
    )%
 2009
    
    
    2008
    
    
    Change
    
    
    % ChangeRevenues from centers acquired in 2008 (1)
    
    $
    180
    
    
    $
    
    
    
    $
    180
    
    
    
    0.7
    %Revenues from centers acquired in 2009
    
    
    283
    
    
    
    
    
    
    
    283
    
    
    
    1.2
    %Revenues from acquired centers
    
    
    463
    
    
    
    
    
    
    
    463
    
    
    
    1.9
    %Revenues from comparable centers (2)
    
    
    21,075
    
    
    
    24,529
    
    
    
    (3,454
    )
    
    
    (14.1
    )%Revenues from contract services (3)
    
    
    290
    
    
    
    
    
    
    
    290
    
    
    
    1.2
    %Total net revenues
    
    $
    21,828
    
    
    $
    24,529
    
    
    $
    (2,701
    )
    
    
    (11.0
    )%
 (1)
    
    Represents that portion of revenues from the 2008 acquired centers recognized for those
acquisitions that had less than one full year of revenues recorded in 2008 due to the
timing of their acquisition.(2)
    
    Also includes revenues from the network business segment.(3)
    
    Represents fees earned pursuant to the support agreement entered into upon the sale of
our Canadian operations.   24




---



##### Table of Contents



Cost of Products Sold and Services
 Dollars in thousands
 2009
    
    
    2008
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    4,543
    
    
    $
    5,963
    
    
    $
    (1,420
    )
    
    
    (23.8
    )%Services
    
    
    441
    
    
    
    571
    
    
    
    (130
    )
    
    
    (22.8
    )%Total cost of products sold and services
    
    $
    4,984
    
    
    $
    6,534
    
    
    $
    (1,550
    )
    
    
    (23.7
    )%Percent of total net revenues
    
    
    22.8
    %
    
    
    26.6
    %
    
    
    (3.8
    )%
    
    
    (14.3
    )%
   2009
    
    
    2008
    
    
    Change
    
    
    %Rebates offsetting base required payments on Tranche C
    
    $
    500
    
    
    $
    500
    
    
    $
    
    
    
    
    Volume rebates used to reduce Tranche C principal
    
    
    152
    
    
    
    313
    
    
    
    (161
    )
    
    
    (51.4
    )%Required principal payments of $65 per Siemens unit
from acquired centers on Tranche B
    
    
    173
    
    
    
    204
    
    
    
    (31
    )
    
    
    (15.2
    )%Rebates offsetting interest on Tranches B and C
    
    
    861
    
    
    
    716
    
    
    
    145
    
    
    
    20.3
    %Total rebate credits
    
    $
    1,686
    
    
    $
    1,733
    
    
    $
    (47
    )
    
    
    (2.7
    )%Percent of total net revenues
    
    
    7.7
    %
    
    
    7.1
    %
    
    
    0.6
    %
    
    
    8.5
    %
  Expenses
 Dollars in thousands
 2009
    
    
    2008
    
    
    Change
    
    
    %Center operating expenses
    
    $
    10,811
    
    
    $
    12,781
    
    
    $
    (1,970
    )
    
    
    (15.4
    )%Percent of total net revenues
    
    
    49.5
    %
    
    
    52.1
    %
    
    
    (2.6
    )%
    
    
    (5.0
    )%General and administrative expenses
    
    $
    3,694
    
    
    $
    3,217
    
    
    $
    477
    
    
    
    14.8
    %Percent of total net revenues
    
    
    16.9
    %
    
    
    13.1
    %
    
    
    3.8
    %
    
    
    29.0
    %Depreciation and amortization
    
    $
    593
    
    
    $
    520
    
    
    $
    73
    
    
    
    14.0
    %Percent of total net revenues
    
    
    2.7
    %
    
    
    2.1
    %
    
    
    0.6
    %
    
    
    28.6
    %
   25




---



##### Table of Contents



Gain on Foreign Exchange
  Interest Expense
 Dollars in thousands
 2009
    
    
    2008
    
    
    Change
    
    
    %Notes payable from business acquisitions and others (1)
    
    $
    276
    
    
    $
    244
    
    
    $
    32
    
    
    
    13.1
    %Long-term contractual commitment-AARP (2)
    
    
    
    
    
    
    260
    
    
    
    (260
    )
    
    
    (100.0
    )%Siemens Tranches B and C  interest forgiven (3)
    
    
    861
    
    
    
    716
    
    
    
    145
    
    
    
    20.3
    %Siemens Tranche D
    
    
    
    
    
    
    289
    
    
    
    (289
    )
    
    
    (100.0
    )%2005 Subordinated Notes (4)
    
    
    
    
    
    
    39
    
    
    
    (39
    )
    
    
    (100.0
    )%Total interest expense
    
    $
    1,137
    
    
    $
    1,548
    
    
    $
    (411
    )
    
    
    (26.6
    )%
 2009
    
    
    2008
    
    
    Change
    
    
    %Total cash interest expense (5)
    
    $
    86
    
    
    $
    612
    
    
    $
    (526
    )
    
    
    (85.9
    )%Total non-cash interest expense (6)
    
    
    1,051
    
    
    
    936
    
    
    
    115
    
    
    
    12.3
    %Total interest expense
    
    $
    1,137
    
    
    $
    1,548
    
    
    $
    (411
    )
    
    
    (26.6
    )%
 (1)
    
    Includes $74,000 and $74,000 in the third quarter of 2009 and 2008, respectively, of
non-cash interest expense related to the recording of notes at their present value by
discounting future payments to market rate of interest (see Note 4  Long-term Debt, Notes to
Consolidated Financial Statements included herein) and $74,000 of non-cash interest expense in
the third quarter of 2009 related to recording of warrants at their fair market value.(2)
    
    Represents non-cash interest expense related to the recording of long-term contractual
commitment to AARP at its present value by discounting future payments to market rate of
interest.(3)
    
    The interest expense on Tranches B and C is forgiven by Siemens as long as the minimum
purchase requirements are met a corresponding rebate credit is recorded as a reduction of the
cost of products sold (see Note 4  Long-term Debt, Notes to Consolidated Financial Statements
included herein and Liquidity and Capital Resources, below).(4)
    
    Third quarter 2008 includes $12,000 of non-cash debt discount amortization (see Note 5 
Subordinated Notes and Warrants, Notes to Consolidated Financial Statements included herein).(5)
    
    Represents the sum of the cash interest portion paid on the notes payable for business
acquisitions and others and the cash interest paid to Siemens on the Siemens Tranche D loans.(6)
    
    Represents the non-cash interest expense related to recording the notes payable for business
acquisitions at their present value by discounting future payments to market rate of interest,
long-term contractual commitment to AARP at its present value by
discounting future payments to market rate of interest, debt discount amortization on the 2005 Subordinated Notes and interest on Siemens Tranches B
and C offset by rebates.   26




---



##### Table of Contents



Income Taxes
   Net Income attributable to noncontrolling interest
  Discontinued Operations
     27




---



##### Table of Contents



For the nine months ended September 26, 2009 compared to the nine months ended September 27,
2008
 Revenues
  2009
    
    
    2008
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    61,172
    
    
    $
    69,241
    
    
    $
    (8,069
    )
    
    
    (11.7
    )%Services
    
    
    6,043
    
    
    
    5,389
    
    
    
    654
    
    
    
    12.1
    %Total net revenues
    
    $
    67,215
    
    
    $
    74,630
    
    
    $
    (7,415
    )
    
    
    (9.9
    )%
 2009
    
    
    2008
    
    
    Change
    
    
    % ChangeRevenues from centers acquired in 2008 (1)
    
    $
    1,866
    
    
    $
    
    
    
    $
    1,866
    
    
    
    2.5
    %Revenues from centers acquired in 2009
    
    
    911
    
    
    
    
    
    
    
    911
    
    
    
    1.2
    %Revenues from acquired centers
    
    
    2,777
    
    
    
    
    
    
    
    2,777
    
    
    
    3.7
    %Revenues from comparable centers (2)
    
    
    63,966
    
    
    
    74,630
    
    
    
    (10,664
    )
    
    
    (14.3
    )%Revenues from contract services (3)
    
    
    472
    
    
    
    
    
    
    
    472
    
    
    
    0.6
    %Total net revenues
    
    $
    67,215
    
    
    $
    74,630
    
    
    $
    (7,415
    )
    
    
    (9.9
    )%
 (1)
    
    Represents that portion of revenues from the 2008 acquired centers recognized for those
acquisitions that had less than one full year of revenues recorded in 2008 due to the
timing of their acquisition.(2)
    
    Also includes revenues from the network business segment.(3)
    
    Represents fees earned pursuant to the support agreement entered into upon the sale of
our Canadian operations.  Cost of Products Sold and Services
 Dollars in thousands
 2009
    
    
    2008
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    14,998
    
    
    $
    18,661
    
    
    $
    (3,663
    )
    
    
    (19.6
    )%Services
    
    
    1,325
    
    
    
    1,627
    
    
    
    (302
    )
    
    
    (18.6
    )%Total cost of products sold and services
    
    $
    16,323
    
    
    $
    20,288
    
    
    $
    (3,965
    )
    
    
    (19.5
    )%Percent of total net revenues
    
    
    24.3
    %
    
    
    27.2
    %
    
    
    (2.9
    )%
    
    
    (10.7
    )%
   28




---



##### Table of Contents



2009
    
    
    2008
    
    
    Change
    
    
    %Rebates offsetting base required payments on Tranche C
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    
    
    
    
    Volume rebates used to reduce Tranche C principal
    
    
    472
    
    
    
    943
    
    
    
    (471
    )
    
    
    (49.9
    )%Rebates offsetting required payments of $65 per
Siemens unit from acquired centers on Tranche B
    
    
    513
    
    
    
    553
    
    
    
    (40
    )
    
    
    (7.2
    )%Rebates offsetting interest on Tranches B and C
    
    
    2,954
    
    
    
    2,104
    
    
    
    850
    
    
    
    40.4
    %Total rebate credits
    
    $
    5,439
    
    
    $
    5,100
    
    
    $
    339
    
    
    
    6.6
    %Percent of total net revenues
    
    
    8.1
    %
    
    
    6.8
    %
    
    
    1.3
    %
    
    
    19.1
    %
  Expenses
 Dollars in thousands
 2009
    
    
    2008
    
    
    Change
    
    
    %Center operating expenses
    
    $
    33,510
    
    
    $
    38,237
    
    
    $
    (4,727
    )
    
    
    (12.4
    )%Percent of total net revenues
    
    
    49.9
    %
    
    
    51.2
    %
    
    
    (1.3
    )%
    
    
    (2.5
    )%General and administrative expenses
    
    $
    11,387
    
    
    $
    11,565
    
    
    $
    (178
    )
    
    
    (1.5
    )%Percent of total net revenues
    
    
    16.9
    %
    
    
    15.5
    %
    
    
    1.4
    %
    
    
    9.0
    %Depreciation and amortization
    
    $
    1,731
    
    
    $
    1,544
    
    
    $
    187
    
    
    
    12.1
    %Percent of total net revenues
    
    
    2.6
    %
    
    
    2.1
    %
    
    
    0.5
    %
    
    
    23.8
    %
     29




---



##### Table of Contents



Gain on Foreign Exchange
  Interest Expense
 Dollars in thousands
 2009
    
    
    2008
    
    
    Change
    
    
    %Notes payable from business acquisitions and others (1)
    
    $
    774
    
    
    $
    673
    
    
    $
    101
    
    
    
    15.0
    %Long-term contractual commitment to AARP (2)
    
    
    
    
    
    
    260
    
    
    
    (260
    )
    
    
    (100.0
    )%Siemens Tranches B and C  interest forgiven (3)
    
    
    2,954
    
    
    
    2,104
    
    
    
    850
    
    
    
    40.4
    %Siemens Tranche D
    
    
    
    
    
    
    712
    
    
    
    (712
    )
    
    
    (100.0
    )%2005 Subordinated Notes (4)
    
    
    
    
    
    
    247
    
    
    
    (247
    )
    
    
    (100.0
    )%Total interest expense
    
    $
    3,728
    
    
    $
    3,996
    
    
    $
    (268
    )
    
    
    (6.7
    )%
 2009
    
    
    2008
    
    
    Change
    
    
    %Total cash interest expense (5)
    
    $
    412
    
    
    $
    1,276
    
    
    $
    (864
    )
    
    
    (67.7
    )%Total non-cash interest expense (6)
    
    
    3,316
    
    
    
    2,720
    
    
    
    596
    
    
    
    21.9
    %Total interest expense
    
    $
    3,728
    
    
    $
    3,996
    
    
    $
    (268
    )
    
    
    (6.7
    )%
 (1)
    
    Includes $252,000 and $290,000 in the first nine months of 2009 and 2008, respectively,
of non-cash interest expense related to recording of notes at their present value by
discounting future payments to market rate of interest (see Note 4  Long-term Debt, Notes
to Consolidated Financial Statements included herein) and $110,000 of non-cash interest
expense in the first nine months of 2009 related to recording warrants at their fair market
value.(2)
    
    Represents non-cash interest expense related to the recording of long-term contractual
commitment to AARP at its present value by discounting future payments to market rate of
interest.(3)
    
    The interest expense on Tranches B and C is forgiven by Siemens as long as the minimum
purchase requirements are met. A corresponding rebate credit is recorded as a
reduction of the cost of products sold (see Note 4  Long-term Debt, Notes to Consolidated
Financial Statements included herein and Liquidity and Capital Resources, below).(4)
    
    The first nine months of 2008 includes $121,000 of non-cash debt discount amortization
(see Note 5  Subordinated Notes and Warrants, Notes to Consolidated Financial Statements
included herein).(5)
    
    Represents the sum of the cash interest portion paid on the notes payable for business
acquisitions and others and the cash interest paid to Siemens on the Siemens Trance D loans.(6)
    
    Represents the non-cash interest expense related to recording the notes payable for
business acquisitions at their present value by discounting future payments to market rate
of interest, long-term contractual commitment to AARP at its present
value by discounting future payments to market rate of interest, 2005 Subordinated Notes related to the debt discount amortization and interest
on Siemens Tranches B and C offset by rebates.  Income Taxes
    30




---



##### Table of Contents



Net Income attributable to noncontrolling interest
  Discontinued Operations
    LIQUIDITY AND CAPITAL RESOURCES
 Working Capital
    31




---



##### Table of Contents



Cash Flows
      Contractual Obligations
  Payments due by period (000s)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    Than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    years$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Long-term debt (1 and 3)
    
    
    44,126
    
    
    
    6,613
    
    
    
    8,904
    
    
    
    5,069
    
    
    
    23,540Subtotal of obligations recorded on balance sheet
    
    
    44,126
    
    
    
    6,613
    
    
    
    8,904
    
    
    
    5,069
    
    
    
    23,540Interest to be paid on long-term debt (2 and 3)
    
    
    16,408
    
    
    
    3,535
    
    
    
    6,345
    
    
    
    5,120
    
    
    
    1,408Operating leases
    
    
    17,139
    
    
    
    6,363
    
    
    
    7,252
    
    
    
    2,684
    
    
    
    840Employment agreements
    
    
    2,896
    
    
    
    1,961
    
    
    
    863
    
    
    
    72
    
    
    
    Purchase obligations (4)
    
    
    3,542
    
    
    
    1,357
    
    
    
    2,185
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    84,111
    
    
    
    19,829
    
    
    
    25,549
    
    
    
    12,945
    
    
    
    25,788
 (1)
    
    Approximately $36.1 million can be repaid through rebate credits from Siemens, including
$2.6 million in less than 1 year and $5.2 million in years 1-3, $4.9 million in years 4-5 and
$23.5 million in more than 5 years.(2)
    
    Interest on long-term debt includes the interest on the new Tranches B and C that can be
repaid through rebate credits from Siemens pursuant to the Amended and Restated Credit
Agreement, including $3.2 million in less than 1 year and $6.1 million in years 1-3, $5.1
million in years 4-5 and
$1.4 million in more than 5 years. Interest repaid through preferred pricing reductions was
$3.0 million in the first nine months of 2009. (See Note 4  Long-Term Debt, Notes to
Consolidated Financial Statements included herein).(3)
    
    Principal and interest payments on long-term debt is based on cash payments and not the fair
value of the discounted notes (See Note 4  Long-Term Debt, Notes to Consolidated Financial
Statements included herein).(4)
    
    Purchase obligations includes the contractual commitment to AARP for campaigns to educate and
promote hearing loss awareness and prevention and the contractual commitment to AARP for
public marketing funds for the AARP Health Care Options General
Program, including $805,000 in less than 1 year.  32




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
  Business acquisitions and goodwill
      33




---



##### Table of Contents




    
    The Companys stock is thinly traded;
    
    The decline in the Companys stock price during 2008 is not directly correlated to a
change in the overall operating performance of the Company; and
    
    Previously unseen pressures are in place given the global financial and economic crisis.
  Revenue recognition
     34




---



##### Table of Contents



Allowance for doubtful accounts
    35




---



##### Table of Contents



Marketable securities as held to maturity, trading and available for sale
   Sales returns
  Vendor rebates
  Marketing allowances
  Impairment of long-lived assets
   36




---



##### Table of Contents



Stock-based compensation
   Income taxes
    RECENT ACCOUNTING PRONOUNCEMENTS
  37




---



##### Table of Contents



Generally Accepted Accounting
Principles
 Measuring Liabilities
at Fair Value
 Multiple-Deliverable
Revenue Arrangements, a consensus of the FASB Emerging Issues Task
Force
  38




---



##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
  Fixed Rate
    
    
    Variable Rate9.5%
    
    
    5% to 16%Due February 2015
    
    
    Other
    
    
    Total$
    
    
    $
    
    
    $(000s)
    
    
    (000s)
    
    
    (000s)2009
    
    
    (2,156
    )
    
    
    (1,250
    )
    
    
    (3,406
    )2010
    
    
    (2,617
    )
    
    
    (3,185
    )
    
    
    (5,802
    )2011
    
    
    (2,589
    )
    
    
    (2,428
    )
    
    
    (5,017
    )2012
    
    
    (2,538
    )
    
    
    (570
    )
    
    
    (3,108
    )2013
    
    
    (2,454
    )
    
    
    (163
    )
    
    
    (2,617
    )Thereafter
    
    
    (23,730
    )
    
    
    
    
    
    
    (23,730
    )Total
    
    
    (36,084
    )
    
    
    (7,596
    )
    
    
    (43,680
    )Estimated fair value
    
    
    (36,084
    )
    
    
    (7,596
    )
    
    
    (43,680
    )
  39




---



##### Table of Contents



Item 4.
    
    Controls and Procedures
    40




---



##### Table of Contents



Part II Other Information
 
 Item 6.
    
    Exhibits
 2.1
    
    
    Plan of Arrangement, including exchangeable share provisions (incorporated herein
by reference to Exhibit 2.3 to the Companys Joint Proxy Statement/Prospectus on
Form S-4 (Reg. No. 333-73022)).3.1
    
    
    Restated Certificate of Incorporation of HEARx Ltd., including certain certificates
of designations, preferences and rights of certain preferred stock of the Company
(incorporated herein by reference to Exhibit 3 to the Companys Current Report on
Form 8-K, filed May 17, 1996 (File No. 001-11655)).3.2
    
    
    Amendment to the Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1A to the Companys Quarterly Report on Form 10-Q for the
period ended June 28, 1996 (File No. 001-11655)).3.3
    
    
    Amendment to Restated Certificate of Incorporation including one for ten reverse
stock split and reduction of authorized shares (incorporated herein to Exhibit 3.5
to the Companys Quarterly Report on Form 10-Q for the period ending July 2, 1999
(File No. 001-11655)).3.4
    
    
    Amendment to Restated Certificate of Incorporation including an increase in
authorized shares and change of name (incorporated herein by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K, filed July 17, 2002 (File No.
001-11655)).3.5
    
    
    Certificate of Designations, Preferences and Rights of the Companys 1999 Series H
Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4
to the Companys Current Report on Form 8-K, filed December 17, 1999 (File No.
001-11655)).3.6
    
    
    Certificate of Designations, Preferences and Rights of the Companys Special Voting
Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Companys
Current Report on Form 8-K, filed July 19, 2002 (File No. 001-11655)).3.7
    
    
    Amendment to Certificate of Designations, Preferences and Rights of the Companys
1999 Series H Junior Participating Preferred Stock (incorporated herein by
reference to Exhibit 4 to the Companys Current Report on Form 8-K, filed July 17,
2002 (File No. 001-11655)).3.8
    
    
    Certificate of Designations, Preferences and Rights of the Companys 1998-E
Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed August 28, 2003 (File No. 001-11655)).3.9
    
    
    Amendment of Restated Certificate of Incorporation (increasing authorized capital)
(incorporated herein by reference to Exhibit 3.9 to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 26, 2004).3.10
    
    
    Amended and Restated By-Laws of HearUSA, Inc., effective as of October 26, 2009
(incorporated herein by reference to Exhibit 3.1 to the Companys Current Report on
Form 8-K, filed October 27, 2009).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).
  41




---



##### Table of Contents



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
    
    
    Amendment No. 1 to the AARP Hearing Care Program Services Agreement with AARP Inc.
(AARP) and AARP Services Inc. (ASI) (the Services Agreement Amendment), dated
August 11, 2009.10.2
    
    
    Amendment No. 2 to the AARP License Agreement with AARP (the License Agreement
Amendment), dated August 11, 2009.10.3
    **
    
    Form of Nonqualified Option Grant Agreement (pursuant to Amended and Restated 2007
Incentive Compensation Plan) (incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K, filed September 11, 2009.31.1
    
    
    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 200232.1
    
    
    CEO and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 **
    
    Designates a management compensatory plan or arrangement  42




---



##### Table of Contents



SIGNATURES
  HearUSA Inc.
(Registrant)November 10, 2009
    /s/ Stephen J. HansbroughStephen J. HansbroughChairman and Chief Executive Officer
HearUSA, Inc./s/ Francisco PuñalFrancisco PuñalSenior Vice President and
Chief Financial Officer
HearUSA, Inc.  43