UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended     March 29, 2008
 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 ofIncorporation or Organization)
    
    (I.R.S. Employer
Identification No.)1250 Northpoint Parkway, West Palm Beach, Florida
    
    33407(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code (561) 478-8770
 
 Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
 Indicate
by check þ whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days       Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
 Large accelerated filero
    
    Accelerated filero
    
    Non-accelerated filerþ
    
    Smaller Reporting Companyo(Do not check if a smaller reporting company)
 Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act).      Yes o No þ
 On May 4, 2008, 38,037,049 shares of the Registrants Common Stock and 534,761 exchangeable shares
of HEARx Canada, Inc. were outstanding.




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##### 



INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets
March 29, 2008 and December 29, 2007
    
    
    3Consolidated Statements of Operations
Three months ended March 29, 2008 and March 31, 2007
    
    
    4Consolidated Statements of Cash Flows
Three months ended March 29, 2008 and March 31, 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 6. Exhibits
    
    
    31Signatures
    
    
    33




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##### 



Part I  Financial Information
 Item 1. Financial Statements
 HearUSA, Inc.
 Consolidated Balance Sheets
(unaudited)
 March 29,
    
    
    December 29,2008
    
    
    2007(Dollars in thousands)ASSETS (Note 3)Current assetsCash and cash equivalents
    
    $
    3,597
    
    
    $
    3,369Accounts and notes receivable, less allowance for
doubtful accounts of $525,000 and $498,000
    
    
    9,491
    
    
    
    8,825Inventories
    
    
    2,536
    
    
    
    2,441Prepaid expenses and other
    
    
    1,468
    
    
    
    1,283Deferred tax asset
    
    
    62
    
    
    
    62Total current assets
    
    
    17,154
    
    
    
    15,980Property and equipment, net (Notes 2)
    
    
    4,251
    
    
    
    4,356Goodwill (Notes 2)
    
    
    63,912
    
    
    
    63,134Intangible assets, net (Notes 2)
    
    
    15,952
    
    
    
    16,165Deposits and other
    
    
    701
    
    
    
    691Restricted cash and cash equivalents
    
    
    216
    
    
    
    216Total Assets
    
    $
    102,186
    
    
    $
    100,542LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    13,375
    
    
    $
    12,467Accrued expenses
    
    
    3,220
    
    
    
    2,523Accrued salaries and other compensation
    
    
    3,968
    
    
    
    3,521Current maturities of long-term debt
    
    
    11,611
    
    
    
    10,746Current maturities of subordinated notes, net of
debt discount of $12,000 and $60,000
    
    
    1,088
    
    
    
    1,480Dividends payable
    
    
    34
    
    
    
    34Minority interest in net income of consolidated joint venture, currently payable
    
    
    966
    
    
    
    1,221Total current liabilities
    
    
    34,262
    
    
    
    31,922Long-term debt (Notes 3 and 6)
    
    
    36,008
    
    
    
    36,499Deferred income taxes
    
    
    6,662
    
    
    
    6,462Total long-term liabilities
    
    
    42,670
    
    
    
    42,961Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity (Note 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 38,571,810 and 38,325,414 shares issued
    
    
    3,857
    
    
    
    3,833Stock subscription
    
    
    (412
    )
    
    
    (412
    )Additional paid-in capital
    
    
    133,598
    
    
    
    133,261Accumulated deficit
    
    
    (113,761
    )
    
    
    (113,076
    )Accumulated other comprehensive income
    
    
    4,457
    
    
    
    4,468Treasury stock, at cost: 523,662 common shares
    
    
    (2,485
    )
    
    
    (2,485
    )Total Stockholders Equity
    
    
    25,254
    
    
    
    25,589Total Liabilities and Stockholders Equity
    
    $
    102,186
    
    
    $
    100,542
 See accompanying notes to consolidated financial statements
 3




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##### 



HearUSA, Inc
 Consolidated Statements of Operations
(unaudited)
 March 29,
    
    
    March 31,2008
    
    
    2007(Dollars in thousands, except pershare amounts)Net revenuesHearing aids and other products
    
    $
    26,680
    
    
    $
    21,972Services
    
    
    2,008
    
    
    
    1,614Total net revenues
    
    
    28,688
    
    
    
    23,586Operating costs and expensesHearing aids and other products (Note 3)
    
    
    7,588
    
    
    
    5,738Services
    
    
    545
    
    
    
    476Total cost of products sold and services
    
    
    8,133
    
    
    
    6,214Center operating expenses
    
    
    14,023
    
    
    
    11,609General and administrative expenses (Notes 1 and 7)
    
    
    4,759
    
    
    
    3,632Depreciation and amortization
    
    
    662
    
    
    
    489Total operating costs and expenses
    
    
    27,577
    
    
    
    21,944Income from operations
    
    
    1,111
    
    
    
    1,642Non-operating income (expenses) :Interest income
    
    
    16
    
    
    
    47Interest expense (Notes 2, 3, 4 and 5)
    
    
    (1,241
    )
    
    
    (1,680
    )Income (loss) from continuing operations before income tax expense, loss from
discontinued operations and minority interest in income of consolidated Joint
Venture
    
    
    (114
    )
    
    
    9Income tax expense
    
    
    (200
    )
    
    
    (147
    )Minority interest in income of consolidated joint venture
    
    
    (336
    )
    
    
    (424
    )Net loss
    
    
    (650
    )
    
    
    (562
    )Dividends on preferred stock
    
    
    (35
    )
    
    
    (33
    )Net loss applicable to common stockholders
    
    $
    (685
    )
    
    $
    (595
    )Net loss applicable to common stockholders per common share  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.02
    )Weighted average number of shares of common stock outstanding  basic and diluted
    
    
    38,588
    
    
    
    32,272
 See accompanying notes to consolidated financial statements
 4




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##### 



HearUSA, Inc.
 Consolidated Statements of Cash Flows
Three Months Ended March 29, 2008 and March 31, 2007
(unaudited)
 March 29,
    
    
    March 31,2008
    
    
    2007(Dollars in thousands)Cash flows from operating activitiesNet loss
    
    $
    (650
    )
    
    $
    (562
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Debt discount amortization
    
    
    105
    
    
    
    614Depreciation and amortization
    
    
    662
    
    
    
    489Employee and director stock-based compensation
    
    
    222
    
    
    
    139Provision for doubtful accounts
    
    
    120
    
    
    
    90Minority interest in income of Joint Venture
    
    
    336
    
    
    
    424Deferred income tax expense
    
    
    200
    
    
    
    147Interest on discounted notes payable
    
    
    134
    
    
    
    Consulting stock-based compensation
    
    
    11
    
    
    
    104Loss on disposition of property and equipment
    
    
    56
    
    
    
    Principal payments on long-term debt made through rebate credits
    
    
    (991
    )
    
    
    (1,160
    )Other
    
    
    
    
    
    
    (5
    )(Increase) decrease in:Accounts and notes receivable
    
    
    (885
    )
    
    
    295Inventories
    
    
    (73
    )
    
    
    (357
    )Prepaid expenses and other
    
    
    (224
    )
    
    
    151Increase (decrease) in:Accounts payable and accrued expenses
    
    
    3,119
    
    
    
    (520
    )Accrued salaries and other compensation
    
    
    446
    
    
    
    (407
    )Net cash provided by (used in) operating activities
    
    
    2,588
    
    
    
    (558
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (311
    )
    
    
    (141
    )Business acquisitions
    
    
    (683
    )
    
    
    (1,524
    )Net cash used in investing activities
    
    
    (994
    )
    
    
    (1,665
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    779
    
    
    
    6,531Principal payments on long-term debt
    
    
    (1,306
    )
    
    
    (699
    )Principal payments on subordinated notes
    
    
    (440
    )
    
    
    (440
    )Proceeds from the exercise of employee options
    
    
    129
    
    
    
    13Dividends paid on preferred stock
    
    
    (35
    )
    
    
    (35
    )Distributions paid to minority interest
    
    
    (591
    )
    
    
    (579
    )Net cash provided by (used in) financing activities
    
    
    (1,464
    )
    
    
    4,791Effects of exchange rate changes on cash
    
    
    98
    
    
    
    72Net increase in cash and cash equivalents
    
    
    228
    
    
    
    2,640Cash and cash equivalents at the beginning of period
    
    
    3,369
    
    
    
    2,325Cash and cash equivalents at the end of period
    
    $
    3,597
    
    
    $
    4,965Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    270
    
    
    $
    494Supplemental schedule of non-cash investing and financing activities:Principal payments on long-term debt made through rebate credits
    
    $
    (991
    )
    
    $
    (1,160
    )Issuance of notes payable in exchange for business acquisitions
    
    $
    472
    
    
    $
    1,549Issuance of capital lease in exchange for property and equipment
    
    $
    
    
    
    $
    112Conversion of accounts payable to notes payable
    
    $
    1,543
    
    
    $
    
 See accompanying notes to consolidated financial statements
 5




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##### 



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




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##### 



Comprehensive income (loss)
   Three Months EndedMarch 29,
    
    
    March 31,Dollars in thousands
    
    2008
    
    
    2007Net loss for the period
    
    $
    (650
    )
    
    $
    (562
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (11
    )
    
    
    115Comprehensive loss for the period
    
    $
    (661
    )
    
    $
    (447
    )
 2. Business Acquisitions
   3. Long-term Debt ( Notes 4 and 5)
  March 29,
    
    
    December 29,Dollars in thousands
    
    2008
    
    
    2007Notes payable to SiemensTranche B
    
    $
    5,473
    
    
    $
    5,403Tranche C
    
    
    23,572
    
    
    
    23,670Tranche D
    
    
    7,709
    
    
    
    7,895Tranche E
    
    
    1,545
    
    
    
    Total notes payable to Siemens
    
    
    38,299
    
    
    
    36,968Notes payable from business acquisitions and other
    
    
    9,320
    
    
    
    10,27747,619
    
    
    
    47,245Less current maturities
    
    
    11,611
    
    
    
    10,746$
    36,008
    
    
    $
    36,499
 7




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##### 



2009
    
    $
    11,6112010
    
    
    6,8142011
    
    
    3,2382012
    
    
    2,3292013
    
    
    23,627
 Notes payable to Siemens
      8




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##### 



Rebates on product sales
     Three months endedMarch 29,
    
    
    March 31,Dollars in thousands
    
    2008
    
    
    2007Portion applied against quarterly principal payments
    
    $
    991
    
    
    $
    1,160Portion applied against quarterly interest payments
    
    
    698
    
    
    
    640$
    1,689
    
    
    $
    1,800
 Conversion rights
   9




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##### 



Covenants
  Notes payable from business acquisitions and other
  4. Convertible Subordinated Notes
   5. Subordinated Notes and Warrant Liability
   10




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##### 



6. Fair Value
    Level 1-
    
    Quoted prices (unadjusted) in active markets for identical assets or liabilities;Level 2-
    
    Inputs other than quoted prices included in Level 1 that are either directly or
indirectly observable;Level 3-
    
    Unobservable inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that
market participants would use in pricing.
   11




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##### 



7. Stock-based Compensation
   Stock-based payment award activity
  WeightedAverageRemainingWeighted
    
    
    ContractualAverage
    
    
    Term
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    (in years)
    
    
    Intrinsic ValueOutstanding at December 29, 2007
    
    
    5,158
    
    
    $
    1.28
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    Exercised
    
    
    (185
    )
    
    
    0.70
    
    
    
    
    
    
    $
    129Forfeited/expired/cancelled
    
    
    (80
    )
    
    
    2.39
    
    
    
    
    
    
    
    Outstanding at March 29, 2008
    
    
    4,893
    
    
    $
    1.29
    
    
    
    5.52
    
    
    $
    1,085Exercisable at March 29, 2008
    
    
    3,452
    
    
    $
    1.23
    
    
    
    4.44
    
    
    $
    1,079
 12




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##### 



WeightedAverageGrant-DateFairShares
    
    
    ValueNon-vested at December 29, 2007
    
    
    1,460
    
    
    $
    1.44Granted
    
    
    
    
    
    
    Vested
    
    
    (19
    )
    
    
    2.31Forfeited unvested
    
    
    
    
    
    
    Non-vested at March 29, 2008
    
    
    1,441
    
    
    $
    1.42
 Restricted stock units
   Restricted Stock Units (1)Outstanding at December 29, 2007
    
    
    Awarded
    
    
    482,000Vested
    
    
    Cancelled
    
    
    Outstanding at March 29, 2008
    
    
    482,000
 
 (1)
    
    Each stock unit represents the fair market value of one share of common stock.   8. Segments
  13




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##### 



Dollars in thousands
    
    Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalHearing aids and other products revenues3 months ended
March 29, 2008
    
    $
    26,651
    
    
    $
    29
    
    
    
    
    
    
    
    
    
    
    $
    26,6803 months ended
March 31, 2007
    
    $
    21,939
    
    
    $
    33
    
    
    
    
    
    
    
    
    
    
    $
    21,972Service revenues3 months ended
March 29, 2008
    
    $
    1,383
    
    
    $
    
    
    
    $
    625
    
    
    
    
    
    
    $
    2,0083 months ended
March 31, 2007
    
    $
    1,283
    
    
    $
    
    
    
    $
    331
    
    
    
    
    
    
    $
    1,614Income (loss) from operations3 months ended
March 29, 2008
    
    $
    5,519
    
    
    $
    (50
    )
    
    $
    514
    
    
    $
    (4,872
    )
    
    $
    1,1113 months ended
March 31, 2007
    
    $
    5,139
    
    
    $
    (24
    )
    
    $
    233
    
    
    $
    (3,706
    )
    
    $
    1,6423 months ended March 29, 2008Depreciation and
amortization
    
    $
    549
    
    
    
    
    
    
    $
    
    
    
    $
    113
    
    
    $
    662Total assets
    
    $
    82,430
    
    
    
    
    
    
    $
    933
    
    
    $
    18,823
    
    
    $
    102,186Capital expenditures
    
    $
    276
    
    
    
    
    
    
    
    
    
    
    $
    35
    
    
    $
    3113 months ended March 31, 2007Depreciation and
amortization
    
    $
    415
    
    
    
    
    
    
    $
    
    
    
    $
    74
    
    
    $
    489Total assets
    
    $
    69,765
    
    
    
    
    
    
    $
    932
    
    
    $
    17,928
    
    
    $
    88,625Capital expenditures
    
    $
    42
    
    
    
    
    
    
    
    
    
    
    $
    99
    
    
    $
    141
  Three months endedMarch 29,
    
    
    March 31,2008
    
    
    2007Hearing aid revenues
    
    
    95.4
    %
    
    
    95.4
    %Other products revenues
    
    
    4.6
    %
    
    
    4.6
    %
  Three months endedMarch 29,
    
    
    March 31,2008
    
    
    2007Hearing aid repairs
    
    
    44.1
    %
    
    
    51.8
    %Testing and other income
    
    
    55.9
    %
    
    
    48.2
    %
 14




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##### 



Three months endedMarch 29,
    
    
    March 31,Dollars in thousands
    
    2008
    
    
    2007General and administrative expense
    
    $
    4,759
    
    
    $
    3,632Corporate depreciation and amortization
    
    
    113
    
    
    
    74Corporate loss from operations
    
    $
    4,872
    
    
    $
    3,706
   United States
    
    
    Canada
    
    
    United States
    
    
    CanadaDollars in thousands
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007Hearing aid and
other products
revenues
    
    $
    22,919
    
    
    $
    3,761
    
    
    $
    19,676
    
    
    $
    2,296Service revenues
    
    
    1,841
    
    
    
    167
    
    
    
    1,486
    
    
    
    128Long-lived assets
    
    
    68,740
    
    
    
    16,293
    
    
    
    59,001
    
    
    
    13,380Total assets
    
    
    82,406
    
    
    
    19,592
    
    
    
    72,946
    
    
    
    15,679
 9. Liquidity
    15




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##### 



RECENT ACCOUNTING PRONOUNCEMENTS
  ,
 
 16




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##### 



Forward Looking Statements
 This Form 10-Q and, in particular, this managements discussion and
analysis contain or incorporate a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Act of 1934.  These statements
include those relating to the Companys belief that its current cash and cash equivalents and cash flow from operations at current net revenue levels will be sufficient to support the Companys operational needs through the next twelve months; belief that the Company is in line to achieve its revenues growth objective for the year of 15% to 20% and its revenues target to exceed $120 million in 2008; expectation that in the remainder of 2008 the total cost of products sold
before the Siemens rebate credits as a percent of total net revenues will be consistent with the first quarter of 2008; expectation that in the remainder of 2008 the Siemens rebate credit in absolute dollars will remain consistent with the first quarter of 2008; 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 and long-term
objective to reach an income from operations, in percent of total net revenues, of 10% to 12%.  These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and managements beliefs and assumptions.  Any statements that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial
statements and notes to the consolidated financial statements included in this report.
The statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict, including successful implementation
of the companys acquisition program; integration of the newly acquired centers and maintenance
of revenue levels from those centers; the  companys ability to maintain cost controls and limit
expenses;  the ability of the company to maintain unit sales of Siemens hearing aids and
to otherwise comply with the Siemens agreements; market demand for the companys goods and services;
changes in the pricing environment; general economic conditions in those geographic regions where the
companys centers are located; the impact of competitive products; and other
risks and uncertainties described in the companys filings with the Securities and Exchange
Commission, including the companys Form 10-K for the fiscal year ended December 29, 2007.
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 GENERAL
    17




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##### 



RESULTS OF OPERATIONS
 For the three months ended March 29, 2008 compared to the three months ended March 31, 2007
 Revenues
  2008
    
    
    2007
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    26,680
    
    
    $
    21,972
    
    
    $
    4,708
    
    
    
    21.4
    %Services
    
    
    2,008
    
    
    
    1,614
    
    
    
    394
    
    
    
    24.4
    %Total net revenues
    
    $
    28,688
    
    
    $
    23,586
    
    
    $
    5,102
    
    
    
    21.6
    %
 2008
    
    
    2007
    
    
    Change
    
    
    % Change (3)Revenues from centers acquired in 2007 (1)
    
    $
    2,672
    
    
    $
    
    
    
    $
    2,672
    
    
    
    11.3
    %Revenues from centers acquired in 2008
    
    
    219
    
    
    
    
    
    
    
    219
    
    
    
    0.9
    %Revenues from acquired centers
    
    
    2,891
    
    
    
    
    
    
    
    2,891
    
    
    
    12.2
    %Revenues from comparable centers (2)
    
    
    25,797
    
    
    
    23,586
    
    
    
    2,211
    
    
    
    9.4
    %Total net revenues
    
    $
    28,688
    
    
    $
    23,586
    
    
    $
    5,102
    
    
    
    21.6
    %
 
 (1)
    
    Represents that portion of revenues from the 2007 acquired centers recognized for those
acquisitions that had less than one full year of revenues recorded in 2007 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 of 2007 total net revenues.   Cost of Products Sold and Services
 Dollars in thousands
 2008
    
    
    2007
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    7,588
    
    
    $
    5,738
    
    
    $
    1,850
    
    
    
    32.2
    %Services
    
    
    545
    
    
    
    476
    
    
    
    69
    
    
    
    14.5
    %Total cost of products sold and services
    
    $
    8,133
    
    
    $
    6,214
    
    
    $
    1,919
    
    
    
    30.9
    %Percent of total net revenues
    
    
    28.3
    %
    
    
    26.3
    %
    
    
    2.0
    %
    
    
    7.6
    %
 18




---



##### 



2008
    
    
    2007
    
    
    Change
    
    
    %Principal payments on Tranche C forgiven
    
    $
    818
    
    
    $
    1,042
    
    
    $
    (224
    )
    
    
    (21.5
    )%Principal payments of $65 per Siemens unit
from acquired centers on Tranche B forgiven
    
    
    173
    
    
    
    118
    
    
    
    55
    
    
    
    46.6
    %Interest
payments on Tranches B and C forgiven
    
    
    698
    
    
    
    640
    
    
    
    58
    
    
    
    9.1
    %Total rebate credits
    
    $
    1,689
    
    
    $
    1,800
    
    
    $
    (111
    )
    
    
    (6.2
    )%Percent of total net revenues
    
    
    5.9
    %
    
    
    7.6
    %
    
    
    (1.7
    )%
    
    
    (22.4
    )%
   Expenses
 Dollars in thousands
 2008
    
    
    2007
    
    
    Change
    
    
    %Center operating expenses
    
    $
    14,023
    
    
    $
    11,609
    
    
    $
    2,414
    
    
    
    20.8
    %Percent of total net revenues
    
    
    48.9
    %
    
    
    49.2
    %
    
    
    (0.3
    )%
    
    
    (0.6
    )%General and administrative expenses
    
    $
    4,759
    
    
    $
    3,632
    
    
    $
    1,127
    
    
    
    31.0
    %Percent of total net revenues
    
    
    16.6
    %
    
    
    15.4
    %
    
    
    1.2
    %
    
    
    7.8
    %Depreciation and amortization
    
    $
    662
    
    
    $
    489
    
    
    $
    173
    
    
    
    35.4
    %Percent of total net revenues
    
    
    2.3
    %
    
    
    2.1
    %
    
    
    0.2
    %
    
    
    9.5
    %
   19




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##### 



Interest Expense
 Dollars in thousands
 2008
    
    
    2007
    
    
    Change
    
    
    %Notes payable from business acquisitions and others (1)
    
    $
    242
    
    
    $
    119
    
    
    $
    123
    
    
    
    103.4
    %Siemens Tranches B and C  interest forgiven (2)
    
    
    698
    
    
    
    640
    
    
    
    58
    
    
    
    9.1
    %Siemens Tranche D
    
    
    180
    
    
    
    59
    
    
    
    121
    
    
    
    205.1
    %2003 Convertible Subordinated Notes (3)
    
    
    
    
    
    
    606
    
    
    
    (606
    )
    
    
    (100.0
    )%2005 Subordinated Notes (4)
    
    
    121
    
    
    
    256
    
    
    
    (135
    )
    
    
    (52.7
    )%Total interest expense
    
    $
    1,241
    
    
    $
    1,680
    
    
    $
    (439
    )
    
    
    (26.1
    )%
 2008
    
    
    2007
    
    
    Change
    
    
    %Total cash interest expense (5)
    
    $
    340
    
    
    $
    426
    
    
    $
    (54
    )
    
    
    (12.7
    )%Total non-cash interest expense (6)
    
    
    901
    
    
    
    1,254
    
    
    
    (385
    )
    
    
    (30.7
    )%Total interest expense
    
    $
    1,241
    
    
    $
    1,680
    
    
    $
    (439
    )
    
    
    (26.1
    )%
 
 (1)
    
    Includes $134,000 of non-cash interest expense related to recording of notes at their
present value by discounting future payments to market rate of interest (see Note 3 
Long-term Debt, Notes to Consolidated Financial Statements included herein).(2)
    
    The interest expense on Tranches B and C is forgiven by Siemens as long as the minimum
purchase requirements are met and a corresponding rebate credit is recorded in reduction of
the cost of products sold (see Note 3  Long-term Debt, Notes to Consolidated Financial
Statements included herein and Liquidity and Capital Resources, below).(3)
    
    Includes $457,000 in 2007 non-cash debt discount amortization (see Note 4  Convertible
Subordinated Notes, Notes to Consolidated Financial Statements included herein).(4)
    
    Includes $69,000 in 2008 and $157,000 in 2007 of non-cash debt discount amortization (see
Note 5  Subordinated Notes and Warrant Liability, 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, the cash interest paid to Siemens on the Siemens Trance D loans and
the cash portion paid on the Convertible Subordinated and Subordinated Notes in 2007.(6)
    
    Represents the sum of the non-cash interest expense related to recording the notes payable
for business acquisitions at their present value by discounting future payments to market rate
of interest, Tranches B and C, the non-cash interest imputed to the 2003 Convertible
Subordinated Notes in 2007 and 2005 Subordinated Notes related to the debt discount
amortization.   Income Taxes
  20




---



##### 



Minority Interest
  LIQUIDITY AND CAPITAL RESOURCES
 Siemens Transaction
   Financing and rebate arrangement
   21




---



##### 



Calculation of Pro forma Rebates to HearUSA when at least 90% ofUnits Sold are from Siemens (1)Quarterly Siemens Unit Sales Compared to Prior Years Comparable Quarter90% but < 95%
    
    
    95% to 100%
    
    
    > 100% < 125%
    
    
    125% and >Tranche B Rebate (2)
    
    $65/unit
    
    
    $65/unit
    
    
    $65/unit
    
    
    $65/unitPlus
    
    
    Plus
    
    
    Plus
    
    
    PlusTranche C Rebate
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    500,000Additional Volume Rebate
    
    
    
    
    
    
    156,250
    
    
    
    312,500
    
    
    
    468,750Interest Forgiveness Rebate (3)
    
    
    712,500
    
    
    
    712,500
    
    
    
    712,500
    
    
    
    712,500$
    1,212,500
    
    
    $
    1,368,750
    
    
    $
    1,525,000
    
    
    $
    1,681,250
 
 (1)
    
    Calculated using trailing twelve month units sold by the Company(2)
    
    Siemens units sold by acquired businesses ($65 per unit)(3)
    
    Assuming the first $30 million portion of the line of credit is fully utilized   2008
    
    
    2007Principal payments on Tranche C forgiven
    
    $
    818
    
    
    $
    1,042Principal payments of $65 per Siemens unit from
acquired centers on Tranche B forgiven
    
    
    173
    
    
    
    118Interest payments on Tranches B and C forgiven
    
    
    698
    
    
    
    640Total rebate credits
    
    $
    1,689
    
    
    $
    1,800
   Advertising arrangement
  22




---



##### 



Investor and other rights arrangement
    Working Capital
   Cash Flows
  23




---



##### 



Contractual Obligations
  Payments due by period (000s)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    13
    
    
    45
    
    
    Than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    yearsLong-term debt (1 and 3)
    
    $
    48,110
    
    
    $
    11,866
    
    
    $
    9,522
    
    
    $
    23,212
    
    
    $
    3,510Subordinated notes
    
    
    1,100
    
    
    
    1,100
    
    
    
    
    
    
    
    
    
    
    
    Subtotal of obligations recorded on balance sheet
    
    
    49,210
    
    
    
    12,966
    
    
    
    9,522
    
    
    
    23,212
    
    
    
    3,510Interest to be paid on long-term debt (2 and 3)
    
    
    16,223
    
    
    
    3,997
    
    
    
    7,150
    
    
    
    5,076
    
    
    
    Interest to be paid on subordinated notes
    
    
    20
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    20,706
    
    
    
    6,313
    
    
    
    9,594
    
    
    
    3,347
    
    
    
    1,452Employment agreements
    
    
    5,374
    
    
    
    2,530
    
    
    
    2,844
    
    
    
    
    
    
    
    Purchase obligations
    
    
    1,662
    
    
    
    717
    
    
    
    945
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    93,195
    
    
    
    26,543
    
    
    
    30,055
    
    
    
    31,635
    
    
    
    4,962
 
 (1)
    
    Approximately $29.0 million can be repaid through rebate credits from Siemens, including $2.2
million in less than 1 year and $4.5 million in years 1-3
and $22.3 million in years 4-5.(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 $2.7 million in less than 1 year and $4.7 million in years 1-3 and $3.7
in years 4-5. Interest repaid through preferred pricing reductions was $2.7 million in 2007.
(See Note 3  Long-Term Debt, Notes to Consolidated Financial Statements included herein).(3)
    
    Principal and interest payments on long-term debt is based on cash payments and not the fair
value of the discounted notes (See Note 3  Long-Term Debt, Notes to Consolidated Financial
Statements included herein). 24




---



##### 



CRITICAL ACCOUNTING POLICIES
  Goodwill
  Revenue recognition
  
   25




---



##### 



Allowance for doubtful accounts
   Sales returns
  Vendor rebates
  26




---



##### 



Advertising allowances
  Impairment of long-lived assets
  Stock-based compensation
 Share-Based Payment
    Income taxes
   27




---



##### 



RECENT ACCOUNTING PRONOUNCEMENTS
  ,
  28




---



##### 



Item 3. Quantitative and Qualitative Disclosure About Market Risk
  Fixed Rate
    
    
    
    
    
    Variable Rate
    
    
    Total9.5%
    
    
    7%
    
    
    5% to 13.9%Due February 2013
    
    
    Due August 2008
    
    
    Other$
    
    
    $
    
    
    $
    
    
    $(000s)
    
    
    (000s)
    
    
    (000s)
    
    
    (000s)2008
    
    
    
    (7,418
    )
    
    
    
    (1,100
    )
    
    
    
    (2,792
    )
    
    
    
    (11,310
    )2009
    
    
    
    (2,231
    )
    
    
    
    
    
    
    
    
    (3,471
    )
    
    
    
    (5,702
    )2010
    
    
    
    (2,231
    )
    
    
    
    
    
    
    
    
    (2,069
    )
    
    
    
    (4,300
    )2011
    
    
    
    (2,231
    )
    
    
    
    
    
    
    
    
    (988
    )
    
    
    
    (3,219
    )2012
    
    
    
    (2,231
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,231
    )2013
    
    
    
    (21,957
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,957
    )Total
    
    
    
    (38,299
    )
    
    
    
    (1,100
    )
    
    
    
    (9,320
    )
    
    
    
    (48,719
    )Estimated fair value
    
    
    
    (38,299
    )
    
    
    
    (1,084
    )
    
    
    
    (9,320
    )
    
    
    
    (48,703
    )
 29




---



##### 



Item 4. Controls and Procedures
   30




---



##### 



Part II Other Information
 Item 6. Exhibits
 2.1
    
    Plan of Arrangement, including exchangeable share provisions (incorporated herein
by reference to Exhibit 2.3 to the Companys Joint Proxy Statement/Prospectus on
Form S-4 (Reg. No. 333-73022)).3.1
    
    Restated Certificate of Incorporation of HEARx Ltd., including certain certificates
of designations, preferences and rights of certain preferred stock of the Company
(incorporated herein by reference to Exhibit 3 to the Companys Current Report on
Form 8-K, filed May 17, 1996 (File No. 001-11655)).3.2
    
    Amendment to the Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1A to the Companys Quarterly Report on Form 10-Q for the
period ended June 28, 1996 (File No. 001-11655)).3.3
    
    Amendment to Restated Certificate of Incorporation including one for ten reverse
stock split and reduction of authorized shares (incorporated herein to Exhibit 3.5
to the Companys Quarterly Report on Form 10-Q for the period ending July 2, 1999
(File No. 001-11655)).3.4
    
    Amendment to Restated Certificate of Incorporation including an increase in
authorized shares and change of name (incorporated herein by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K, filed July 17, 2002 (File No.
001-11655)).3.5
    
    Certificate of Designations, Preferences and Rights of the Companys 1999 Series H
Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4
to the Companys Current Report on Form 8-K, filed December 17, 1999 (File No.
001-11655)).3.6
    
    Certificate of Designations, Preferences and Rights of the Companys Special Voting
Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Companys
Current Report on Form 8-K, filed July 19, 2002 (File No. 001-11655)).3.7
    
    Amendment to Certificate of Designations, Preferences and Rights of the Companys
1999 Series H Junior Participating Preferred Stock (incorporated herein by
reference to Exhibit 4 to the Companys Current Report on Form 8-K, filed July 17,
2002 (File No. 001-11655)).3.8
    
    Certificate of Designations, Preferences and Rights of the Companys 1998-E
Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed August 28, 2003 (File No. 001-11655)).3.9
    
    Amendment of Restated Certificate of Incorporation (increasing authorized capital)
(incorporated herein by reference to Exhibit 3.9 to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 26, 2004).3.10
    
    Amended and Restated By-Laws of HearUSA, Inc. (effective May 9, 2005) (incorporated
herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K,
filed May 13, 2005).4.1
    
    Amended and Restated Rights Agreement, dated July 11, 2002 between HEARx and the
Rights Agent, which includes an amendment to the Certificate of Designations,
Preferences and Rights of the Companys 1999 Series H Junior Participating
Preferred Stock (incorporated herein by reference to Exhibit 4.9.1 to the Companys
Joint Proxy/Prospectus on Form S-4 (Reg. No. 333-73022)).4.2
    
    Form of Support Agreement among HEARx Ltd., HEARx Canada, Inc. and HEARx
Acquisition ULC (incorporated herein by reference to Exhibit 99.3 to the Companys
Joint Proxy Statement/Prospectus on Form S-4 (Reg No. 333-73022)).4.3
    
    Form of 2003 Convertible Subordinated Note due November 30, 2008 (incorporated
herein by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K,
filed December 31, 2003).9.1
    
    Form of Voting and Exchange Trust Agreement among HearUSA, Inc., HEARx Canada, Inc
and HEARx Acquisition ULC and ComputerShare Trust Company of Canada (incorporated
herein by reference to Exhibit 9.1 to the Companys Joint Proxy
Statement/Prospectus on Form S-4 (Reg. No. 333-73022)).
 31




---



##### 



10.1
    
    Retirement Agreement entered into by and between Paul A. Brown, M.D. and the
Company dated February 4, 2008 (incorporated herein by reference to Exhibit 10.31
to the Companys Annual Report on Form 10-K for the year ended December 29, 2007).*10.2
    
    Amended and Restated Executive Employment Agreement entered into by and between the
Company and Stephen J. Hansbrough as of February 25, 2008 (incorporated herein by
reference to Exhibit 10.32 to the Companys Annual Report on Form 10-K for the year
ended December 29, 2007).*10.3
    
    Amended and Restated Executive Employment Agreement entered into by and between the
Company and Gino Chouinard as of February 25, 2008 (incorporated herein by
reference to Exhibit 10.33 to the Companys Annual Report on Form 10-K for the year
ended December 29, 2007).*31.1
    
    CEO Certification, pursuant to Section 30 2of 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
 
 *
    
    Indicates a management compensatory contract or arrangement. 32




---



##### 



SIGNATURES
  May 13, 2008
    HearUSA Inc.
(Registrant)/s/ Stephen J. HansbroughStephen J. HansbroughChief Executive Officer
HearUSA, Inc./s/ Gino ChouinardGino ChouinardChief Financial Officer
HearUSA, Inc. 33