##### 



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 endedMarch 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-11655
 HearUSA, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    22-2748248(State of Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)1250 Northpoint Parkway, West Palm Beach, Florida
    
    33407(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code (561) 478-8770
 Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
 Indicate by check ü whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and non-accelerated
filer in Rule 12b-2 of the Exchange act. (Check one):
 Large accelerated filer o Accelerated filer o Non-accelerated filer þ
 Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2
of the Exchange Act). Yes o No þ
 On May 4, 2007, 37,124,182 shares of the Registrants Common Stock and 760,461 exchangeable shares
of HEARx Canada, Inc. were outstanding.




---



##### 



INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance SheetsMarch 31, 2007 and December 30, 2006
    
    
    3Consolidated Statements of Operations Three months ended March 31, 2007 and April 1, 2006
    
    
    4Consolidated Statements of Cash Flows Three months ended March 31, 2007 and April 1, 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    27PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    28Signatures
    
    
    29




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##### 



Part I  Financial Information
 Item 1. Financial Statements
 HearUSA, Inc.
Consolidated Balance Sheets
(unaudited)
 March 31,
        
    December 30,2007
        
    2006(Dollars in thousands)ASSETS (Note 3)Current assetsCash and cash equivalents
    
    $
    4,965
    
    
    $
    2,326Accounts and notes receivable, less allowance for
doubtful accounts of $411,681 and $434,098
    
    
    7,219
    
    
    
    7,591Inventories
    
    
    2,730
    
    
    
    2,371Prepaid expenses and other
    
    
    1,263
    
    
    
    1,400Deferred tax asset
    
    
    67
    
    
    
    67Total current assets
    
    
    16,244
    
    
    
    13,755Property and equipment, net (Note 2)
    
    
    3,901
    
    
    
    3,878Goodwill (Note 2)
    
    
    52,989
    
    
    
    50,970Intangible assets, net (Note 2)
    
    
    14,524
    
    
    
    13,592Deposits and other
    
    
    758
    
    
    
    876Restricted cash and cash equivalents
    
    
    209
    
    
    
    205Total Assets
    
    $
    88,625
    
    
    $
    83,276LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    9,507
    
    
    $
    10,463Accrued expenses
    
    
    2,962
    
    
    
    2,509Accrued compensation
    
    
    2,483
    
    
    
    2,826Current maturities of long-term debt
    
    
    11,617
    
    
    
    8,391Current maturities of convertible subordinated notes, net of debt discount of
$1,024,558 and $1,263,003
    
    
    5,225
    
    
    
    2,487Current maturities of subordinated notes, net of debt discount of $348,199 and $452,228
    
    
    1,412
    
    
    
    1,308Dividends payable
    
    
    34
    
    
    
    34Minority interest in net income of consolidated joint venture, currently payable
    
    
    478
    
    
    
    633Total current liabilities
    
    
    33,718
    
    
    
    28,651Long-term debt (Notes 2 and 3)
    
    
    31,744
    
    
    
    28,599Deferred income tax liability
    
    
    5,385
    
    
    
    5,234Convertible subordinated notes, net of debt discount of nil and $217,923 (Note 4)
    
    
    
    
    
    
    2,282Subordinated notes, net of debt discount of $12,085 and $60,123 (Note 5)
    
    
    1,088
    
    
    
    1,480Warrant liability (Note 5)
    
    
    
    
    
    
    110Total long-term liabilities
    
    
    38,217
    
    
    
    37,705Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity (Note 6)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
32,048,500 and 32,029,750 shares issued
    
    
    3,205
    
    
    
    3,203Stock subscription
    
    
    (412
    )
    
    
    (412
    )Additional paid-in capital
    
    
    124,220
    
    
    
    123,972Accumulated deficit
    
    
    (110,116
    )
    
    
    (109,521
    )Accumulated other comprehensive income
    
    
    2,278
    
    
    
    2,163Treasury stock, at cost:523,662 common shares
    
    
    (2,485
    )
    
    
    (2,485
    )Total stockholders equity
    
    
    16,690
    
    
    
    16,920Total Liabilities and Stockholders Equity
    
    $
    88,625
    
    
    $
    83,276
 See accompanying notes to consolidated financial statements
 3




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##### 



HearUSA, Inc
Consolidated Statements of Operations
(unaudited)
 March 31,
    
    April 1,2007
    
    

    2006(Dollars in thousands,except per share amounts)Net revenuesHearing aids and other products
    
    $
    21,972
    
    
    $
    20,173Services
    
    
    1,614
    
    
    
    1,484Total net revenues
    
    
    23,586
    
    
    
    21,657Operating costs and expensesHearing aids and other products (Note 3)
    
    
    5,738
    
    
    
    6,112Services
    
    
    476
    
    
    
    373Total cost of products sold and services
    
    
    6,214
    
    
    
    6,485Center operating expenses
    
    
    11,609
    
    
    
    9,767General and administrative expenses (Note 6)
    
    
    3,632
    
    
    
    3,239Depreciation and amortization
    
    
    489
    
    
    
    492Total operating costs and expenses
    
    
    21,944
    
    
    
    19,983Income from operations
    
    
    1,642
    
    
    
    1,674Non-operating income (expenses):Gain from insurance proceeds
    
    
    
    
    
    
    57Interest income
    
    
    47
    
    
    
    22Interest expense (Notes 2, 3, 4 and 5)
    
    
    (1,680
    )
    
    
    (1,410
    )Income before income tax expense and minority interest in income of
consolidated joint venture
    
    
    9
    
    
    
    343Income tax expense
    
    
    (147
    )
    
    
    (267
    )Minority interest in income of consolidated joint venture
    
    
    (424
    )
    
    
    Net income (loss)
    
    
    (562
    )
    
    
    76Dividends on preferred stock
    
    
    (33
    )
    
    
    (35
    )Net income (loss) applicable to common stockholders
    
    $
    (595
    )
    
    $
    41Net income (loss) applicable to common stockholders per common share 
basic and diluted
    
    $
    (0.02
    )
    
    $
    0.00Weighted average number of shares of common stock outstanding  basic
    
    
    32,272
    
    
    
    32,160Weighted average number of shares of common stock outstanding  diluted
    
    
    32,272
    
    
    
    38,825
 See accompanying notes to consolidated financial statements
 4




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##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2007 and April 1, 2006
(unaudited)
 March 31,
    
    
    April 1,2007
        

    2006(Dollars in thousands)Cash flows from operating activitiesNet income (loss)
    
    $
    (562
    )
    
    $
    76Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:Debt discount amortization
    
    
    614
    
    
    
    726Depreciation and amortization
    
    
    489
    
    
    
    492Interest on Siemens Tranche C
    
    
    
    
    
    
    296Employee stock-based compensation
    
    
    139
    
    
    
    233Provision for doubtful accounts
    
    
    90
    
    
    
    91Deferred income tax expense
    
    
    147
    
    
    
    229Consulting stock-based compensation
    
    
    104
    
    
    
    6Loss on disposition of property and equipment
    
    
    
    
    
    
    5Principal payments on long-term debt made through rebate credits
    
    
    (1,160
    )
    
    
    (730
    )Minority interest in income of consolidated subsidiary
    
    
    424
    
    
    
    Decrease in fair value of warrant liability
    
    
    
    
    
    
    (172
    )Other
    
    
    (5
    )
    
    
    (14
    )(Increase) decrease in:Accounts and notes receivable
    
    
    295
    
    
    
    637Inventories
    
    
    (357
    )
    
    
    (464
    )Prepaid expenses and other
    
    
    151
    
    
    
    109Decrease in:Accounts payable and accrued expenses
    
    
    (520
    )
    
    
    (517
    )Accrued salaries and other compensation
    
    
    (407
    )
    
    
    (193
    )Net cash provided by (used in) operating activities
    
    
    (558
    )
    
    
    810Cash flows from investing activitiesPurchase of property and equipment
    
    
    (141
    )
    
    
    (445
    )Business acquisitions
    
    
    (1,524
    )
    
    
    (1,427
    )Net cash used in investing activities
    
    
    (1,665
    )
    
    
    (1,872
    )Cash flows from financing activitiesProceeds from issuance of long-term debt, net of financing cost of $17,000
    
    
    6,531
    
    
    
    Principal payments on long-term debt
    
    
    (699
    )
    
    
    (422
    )Principal payments on convertible subordinated notes
    
    
    
    
    
    
    (625
    )Principal payments on subordinated notes
    
    
    (440
    )
    
    
    (440
    )Proceeds from the exercise of employee options
    
    
    13
    
    
    
    Dividends paid on preferred stock
    
    
    (35
    )
    
    
    (35
    )Distributions paid to minority interest
    
    
    (579
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    4,791
    
    
    
    (1,522
    )Effects of exchange rate changes on cash
    
    
    72
    
    
    
    (5
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,640
    
    
    
    (2,589
    )Cash and cash equivalents at the beginning of period
    
    
    2,325
    
    
    
    6,707Cash and cash equivalents at the end of period
    
    $
    4,965
    
    
    $
    4,118Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    494
    
    
    $
    434Supplemental schedule of non-cash investing and financing activities:Principal payments on long-term debt made through rebate credits
    
    $
    (1,160
    )
    
    $
    (730
    )Issuance of notes payable in exchange for business acquisitions
    
    $
    1,549
    
    
    $
    1,272Issuance of capital lease in exchange for property and equipment
    
    $
    112
    
    
    $
    
 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




---



##### 



Comprehensive income (loss)
   Three Months EndedMarch 31,
        

    April 1,Dollars in thousands
    
    2007
        

    2006Net income (loss) for the period
    
    $
    (562
    )
    
    $
    76Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    115
    
    
    
    (25
    )Comprehensive income (loss) for the period
    
    $
    (447
    )
    
    $
    51
 Reclassifications
  2. Business Acquisitions
   Dollars in thousands, except per share amounts
    
    March 31, 2007
    
    
    April 1, 2006Total revenue
    
    $
    22,916
    
    
    $
    22,905Net loss applicable to common stockholders
    
    $
    (407
    )
    $
    
    121Net loss applicable to common stockholders per share  basic and diluted
    
    $
    (0.01
    )
    $
    
    0.00
 7




---



##### 



3. Long-term Debt (also see Notes 4 and 5)
  Dollars in thousands
    
    March 31, 2007
        
    December 30, 2006Notes payable to SiemensTranche B
    
    $
    3,940
    
    
    $
    3,543Tranche C
    
    
    23,988
    
    
    
    23,997Tranche D
    
    
    7,200
    
    
    
    2,200Total notes payable to Siemens
    
    
    35,128
    
    
    
    29,740Notes payable from business acquisitions and others
    
    
    8,233
    
    
    
    7,250Total debt
    
    
    43,361
    
    
    
    36,990Less current maturities
    
    
    11,617
    
    
    
    8,391Long-term debt
    
    $
    31,744
    
    
    $
    28,599
  Dollars in thousands
    
    Amount2007
    
    $
    11,6172008
    
    
    9,2222009
    
    
    5,3992010
    
    
    4,3932011
    
    
    3,666Thereafter
    
    
    10,206
 Notes payable to Siemens
     8




---



##### 



Dollars in thousands
    
    March 31, 2007
        
    April 1, 2006Portion applied against quarterly principal payments
    
    $
    1,160
    
    
    $
    730Portion applied against quarterly interest payments
    
    
    640
    
    
    
    49$
    1,800
    
    
    $
    779
      9




---



##### 



Notes payable from business acquisitions and other
  4. Convertible Subordinated Notes
    10




---



##### 



5. Subordinated Notes and Warrant Liability
    11




---



##### 



6. Stock-based Compensation
  12




---



##### 



Stock-based Payment Award Activity
  WeightedAverageWeighted
    
    RemainingAverage
    
    Contractual Term
    
    AggregateShares
    
    Exercise
    
    (in years)
    
    Intrinsic ValueOutstanding at December 30, 2006
    
    
    5,318
    
    
    $
    1.30Granted
    
    
    
    
    
    $
    Exercised
    
    
    (19
    )
    
    $
    0.67Forfeited/expired/cancelled
    
    
    (9
    )
    
    $
    8.11Outstanding at March 31, 2007
    
    
    5,290
    
    
    $
    1.30
    
    
    
    6.61
    
    
    $
    3,829Exercisable at March 31, 2007
    
    
    3,155
    
    
    $
    1.35
    
    
    
    5.96
    
    
    $
    2,480
   Weighted AverageGrant-DateShares
            
    Fair ValueNon-vested at December 31, 2006
    
    
    2,211
    
    
    $
    1.25Granted
    
    
    Vested
    
    
    (18
    )
    
    $
    1.34Forfeited unvested
    
    
    (3
    )
    
    $
    1.74Non-vested at March 31, 2007
    
    
    2,190
    
    
    $
    1.24
 7. Segments
  13




---



##### 



Dollars in thousands
    
    Centers
    
    E-commerce
    
    Network
    
    Corporate
    
    TotalHearing aids and other products revenues3 months ended March 31,
2007
    
    $
    21,939
    
    
    $
    33
    
    
    
    
    
    
    
    
    
    
    $
    21,9723 months ended April 1, 2006
    
    $
    20,161
    
    
    $
    12
    
    
    
    
    
    
    
    
    
    
    $
    20,173Service revenues3 months ended March 31,
2007
    
    $
    1,283
    
    
    
    
    
    
    $
    331
    
    
    
    
    
    
    $
    1,6143 months ended April 1, 2006
    
    $
    1,088
    
    
    
    
    
    
    $
    396
    
    
    
    
    
    
    $
    1,484Income (loss) from operations3 months ended March 31,
2007
    
    $
    5,139
    
    
    $
    (24
    )
    
    $
    233
    
    
    $
    (3,706
    )
    
    $
    1,6423 months ended April 1, 2006
    
    $
    4,871
    
    
    $
    (36
    )
    
    $
    127
    
    
    $
    (3,288
    )
    
    $
    1,6743 months ended March 31,
2007Depreciation and
amortization
    
    $
    415
    
    
    
    
    
    
    $
    
    
    
    $
    74
    
    
    $
    489Total assets
    
    $
    69,765
    
    
    
    
    
    
    $
    932
    
    
    $
    17,928
    
    
    $
    88,625Capital expenditures
    
    $
    42
    
    
    
    
    
    
    
    
    
    
    $
    99
    
    
    $
    1413 months ended April 1, 2006Depreciation and
amortization
    
    $
    442
    
    
    
    
    
    
    $
    1
    
    
    $
    49
    
    
    $
    492Total assets
    
    $
    55,065
    
    
    
    
    
    
    $
    1,105
    
    
    $
    14,472
    
    
    $
    70,642Capital expenditures
    
    $
    400
    
    
    
    
    
    
    
    
    
    
    $
    45
    
    
    $
    445
  Three months endedMarch 31,
    
    
    April 1,2007
    
    
    2006Hearing aid revenues
    
    
    95.4
    %
    
    
    97.2
    %Other products revenues
    
    
    4.6
    %
    
    
    2.8
    %
  Three months endedMarch 31,
    
    
    April 1,2007
    
    
    2006Hearing aid repairs
    
    
    51.8
    %
    
    
    54.7
    %Testing and other income
    
    
    48.2
    %
    
    
    45.3
    %
  Three months endedMarch 31,
    
    
    April 1,Dollars in thousands
    
    2007
    
    
    2006General and administrative expense
    
    $
    3,632
    
    
    $
    3,239Depreciation and amortization
    
    $
    74
    
    
    $
    49Corporate loss from operations
    
    $
    3,706
    
    
    $
    3,288
 14




---



##### 



United States
    
    
    Canada
    
    
    United States
    
    
    CanadaIn thousands of
    
    2007
    
    
    2007
    
    
    2006
    
    
    2006dollars
    
    $
    
    
    $
    
    
    $
    
    
    $Hearing aid and
other products
revenues
    
    
    19,676
    
    
    
    2,296
    
    
    
    18,027
    
    
    
    2,146Service revenues
    
    
    1,486
    
    
    
    128
    
    
    
    1,381
    
    
    
    103Long-lived assets
    
    
    59,001
    
    
    
    13,380
    
    
    
    46,902
    
    
    
    10,011Total assets
    
    
    72,946
    
    
    
    15,679
    
    
    
    58,166
    
    
    
    12,476
 8. Income Taxes
 Uncertain Income Tax Positions
        Other Income Tax Disclosures
   15




---



##### 



9. Liquidity
   Forward Looking Statements
 This Form 10-Q and, in particular, this managements discussion and analysis contain or
incorporate a number of forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Act of 1934. These statements include
those relating to the Companys belief that its current cash and cash equivalents and cash flow
from operations at current net revenue levels will be sufficient to support the Companys
operational needs through the next twelve months; belief that the Company is in line to achieve its
revenues growth objective for the year of 15% to 20% and revenues target of $102 million to $107
million in 2007; expectation that in the remainder of 2007 the total cost of products sold before
the Siemens rebate credits as a percent of total net revenues will be consistent with the first
quarter of 2007; expectation that in the remainder of 2007 the Siemens rebate credit in absolute
dollar will remain consistent with the first quarter of 2007; expectation that additional center
operating expenses due to acquisitions should be consistent with the current center operating
expenses when looked at as a percent of total net revenues 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 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, achieving revenue
growth objectives for the year of 15% to 20%; achieving revenues target of $102 million to $107
million, total cost of products sold before Siemens rebate credits as a percentage of total net
revenues remaining consistent with the first quarter of 2007; expectation that in the remainder of
2007 the Siemens rebate credits in absolute dollar will remain consistent with the first quarter of
2007; additional center operating expenses due to acquisitions remaining consistent with the
current center operating as a percentage of total net revenues; and long-term objective to reach an
income from operations, in percent of total net revenues, of 10% to 12% and those risks described
in the Companys annual report on Form 10-K for fiscal 2006 filed with the Securities and Exchange
Commission.
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 GENERAL
  RESULTS OF OPERATIONS
 For the three months ended March 31, 2007 compared to the three months ended April 1, 2006
 Revenues
 Revenues (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    21,972
    
    
    $
    20,173
    
    
    $
    1,799
    
    
    
    8.9
    %Services
    
    
    1,614
    
    
    
    1,484
    
    
    
    130
    
    
    
    8.8
    %Total net revenues
    
    $
    23,586
    
    
    $
    21,657
    
    
    $
    1,929
    
    
    
    8.9
    %
 16




---



##### 



2007
    
    
    2006
    
    
    Change
    
    
    % Change (3)Revenues from centers acquired in 2006 (1)
    
    
    3,254
    
    
    
    
    
    
    
    3,254
    
    
    
    15.0
    %Revenues from centers acquired in 2007
    
    
    238
    
    
    
    
    
    
    
    238
    
    
    
    1.1
    %Total Revenues from acquired centers
    
    
    3,492
    
    
    
    
    
    
    
    3,492
    
    
    
    16.1
    %Revenues from comparable centers (2)
    
    
    20,094
    
    
    
    21,657
    
    
    
    (1,563
    )
    
    
    (7.2
    )%Total net revenues
    
    $
    23,586
    
    
    $
    21,657
    
    
    $
    1,929
    
    
    
    8.9
    %
 (1)
    
    Represents that portion of revenues from the 2006 acquired centers recognized for those
acquisitions that had less than one full quarter of revenues recorded in the first quarter
2006 due to the timing of their acquisition.(2)
    
    Also includes revenues from the network business segment as well as the impact of fluctuation
of the Canadian exchange rate.(3)
    
    The revenues from acquired centers percentage changes are calculated by dividing those
revenues by the total first quarter 2006 net revenues.    Cost of Products Sold and Services
 Cost of products sold and services (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    5,738
    
    
    $
    6,112
    
    
    $
    (374
    )
    
    
    (6.1
    )%Services
    
    
    476
    
    
    
    373
    
    
    
    103
    
    
    
    27.6
    %Total cost of products sold and services
    
    $
    6,214
    
    
    $
    6,485
    
    
    $
    (271
    )
    
    
    (4.2
    )%Percent of total net revenues
    
    
    26.5
    %
    
    
    29.9
    %
    
    
    (3.6
    )%
    
    
    (12.0
    )%
  Siemens rebate credits included above (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Base required payments on Tranches A and C forgiven
    
    $
    1,042
    
    
    $
    730
    
    
    $
    312
    
    
    
    42.7
    %Required payments of $65 per Siemens unit from acquired
centers on Tranche B forgiven
    
    
    118
    
    
    
    
    
    
    
    118
    
    
    
    n/aInterest expense on Tranches A, B and C forgiven
    
    
    640
    
    
    
    49
    
    
    
    591
    
    
    
    1206.1
    %Total Siemens rebate credits
    
    $
    1,800
    
    
    $
    779
    
    
    $
    1,021
    
    
    
    131.1
    %Percent of total net revenues
    
    
    7.6
    %
    
    
    3.6
    %
    
    
    4.0
    %
    
    
    111.1
    %
 17




---



##### 



Expenses
 Operating expenses (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Center operating expenses
    
    $
    11,609
    
    
    $
    9,767
    
    
    $
    1,842
    
    
    
    18.9
    %Percent of total net revenues
    
    
    49.2
    %
    
    
    45.1
    %
    
    
    4.3
    %
    
    
    9.5
    %General and administrative expenses
    
    $
    3,632
    
    
    $
    3,239
    
    
    $
    393
    
    
    
    12.1
    %Percent of total net revenues
    
    
    15.4
    %
    
    
    15.0
    %
    
    
    0.4
    %
    
    
    2.6
    %Depreciation and amortization
    
    $
    489
    
    
    $
    492
    
    
    $
    (3
    )
    
    
    (0.06
    )%Percent of total net revenues
    
    
    2.1
    %
    
    
    2.3
    %
    
    
    (0.2
    %)
    
    
    (8.7
    %)
    18




---



##### 



Income from Operations
     Interest Expense
 Interest expense (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Notes payable from business acquisitions and others
    
    $
    119
    
    
    $
    34
    
    
    $
    85
    
    
    
    250.0
    %Siemens Tranche C2  Interest paid with monthly payments
    
    
    
    
    
    
    126
    
    
    
    (126
    )
    
    
    (100.0
    %)Siemens Tranches C1 and C3  accrued interest added to
loan balance
    
    
    
    
    
    
    296
    
    
    
    (296
    )
    
    
    (100
    %)Siemens Tranches A, B and C  interest forgiven
    
    
    640
    
    
    
    49
    
    
    
    591
    
    
    
    1,206.0
    %Siemens Tranche D-paid monthly
    
    
    59
    
    
    
    
    
    
    
    59
    
    
    
    n/a2003 Convertible Subordinated Notes (1)
    
    
    606
    
    
    
    705
    
    
    
    (99
    )
    
    
    (14.0
    %)2005 Subordinated Notes (2)
    
    
    256
    
    
    
    376
    
    
    
    (120
    )
    
    
    (31.9
    )%Warrant liability change in value (3)
    
    
    
    
    
    
    (176
    )
    
    
    176
    
    
    
    (100.0
    %)Total interest expense
    
    $
    1,680
    
    
    $
    1,410
    
    
    $
    270
    
    
    
    19.1
    %
 (1)
    
    Includes $457,000 in 2007 and $480,000 in 2006 of non-cash debt discount amortization.(2)
    
    Includes $157,000 in 2007 and $246,000 in 2006 of non-cash debt discount amortization.(3)
    
    Relates to the change in value of the warrants related to the 2003 Subordinated Notes and is
a non-cash item.  Income Taxes
  19




---



##### 



Minority Interest
  Net Loss Applicable to Common Stockholders
   LIQUIDITY AND CAPITAL RESOURCES
 Siemens Transaction
    20




---



##### 



21




---



##### 



Working Capital
   Cash Flows
    22




---



##### 



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)
    
    
    43,361
    
    
    
    11,617
    
    
    
    10,903
    
    
    
    7,807
    
    
    
    13,034Convertible subordinated notes (3)
    
    
    6,250
    
    
    
    6,250
    
    
    
    
    
    
    
    
    
    
    
    Subordinated notes
    
    
    2,860
    
    
    
    1,760
    
    
    
    1,100
    
    
    
    
    
    
    
    Subtotal of obligations recorded on balance sheet
    
    
    52,471
    
    
    
    19,627
    
    
    
    12,003
    
    
    
    7,807
    
    
    
    13,034Interest to be paid on long-term debt (2)
    
    
    1,669
    
    
    
    636
    
    
    
    886
    
    
    
    147
    
    
    
    Interest to be paid on convertible subordinated notes (3)
    
    
    119
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    Interest to be paid on subordinated notes
    
    
    164
    
    
    
    144
    
    
    
    20
    
    
    
    
    
    
    
    Operating leases
    
    
    18,462
    
    
    
    4,134
    
    
    
    8,686
    
    
    
    3,921
    
    
    
    1,721Employment agreements
    
    
    4,329
    
    
    
    1,992
    
    
    
    2,112
    
    
    
    225
    
    
    
    Purchase obligations
    
    
    726
    
    
    
    698
    
    
    
    28
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    77,940
    
    
    
    27,350
    
    
    
    23,735
    
    
    
    12,100
    
    
    
    14,755
 
 (1)
    
    Approximately $27.9 million can be repaid through rebate credits from Siemens, including
$4.8 million in less than 1 year and $9.5 in years 1-3, $9.5 in years 4-5 and $4.1 in more
than 5 years.(2)
    
    Interest on long-term debt excludes the interest on the new Tranches A, B and C that can be
repaid through rebate credits from Siemens pursuant to the December 30, 2006 Second Amended
and Restated Credit Agreement. Interest repaid through rebate credits was $640,000 in the
first quarter of 2007. (See Note 3  Long-Term Debt, Notes to Consolidated Financial
Statements included herein).(3)
    
    When due these notes and corresponding interest can be repaid at the option of the Company in
common stock. CRITICAL ACCOUNTING POLICIES
  23




---



##### 



Goodwill
  Revenue recognition
   Allowance for doubtful accounts
   Sales returns
  24




---



##### 



Impairment of Long-Lived Assets
  Stock-based compensation
 Share-Based Payment
  Income taxes
 Accounting for Income Taxes
  25




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##### 



RECENT ACCOUNTING PRONOUNCEMENT
   Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Variable Rate
    
    
    
    Fixed Rate
    
    
    
    Total9.5%
    
    
    
    5% note
    
    
    8%
    
    
    7%due January
    
    
    
    Due January
    
    
    due November
    
    
    Due August2013
    
    
    
    
    2013
    
    
    
    2008
    
    
    
    2008
    
    
    
    Other$
    
    
    
    
    
    
    
    $
    
    
    $
    
    
    $
    
    
    
    $(000s)
    
    
    
    
    (000s)
    
    
    
    (000s)
    
    
    
    (000s)
    
    
    
    (000s)
    
    
    
    
    (000s)2007
    
    
    
    (3,413
    )
    
    
    
    (4,200
    )
    
    
    (6,250
    )
    
    
    (1,320
    )
    
    
    (2,862
    )
    
    
    
    (18,045
    )2008
    
    
    
    (3,577
    )
    
    
    
    (3,000
    )
    
    
    
    
    
    
    (1,540
    )
    
    
    (2,645
    )
    
    
    
    (10,762
    )2009
    
    
    
    (3,577
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,822
    )
    
    
    
    (5,399
    )2010
    
    
    
    (3,577
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (816
    )
    
    
    
    (4,393
    )2011
    
    
    
    (3,577
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (89
    )
    
    
    
    (3,666
    )2012
    
    
    
    (10,206
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,206
    )2013Total
    
    
    
    (27,927
    )
    
    
    
    (7,200
    )
    
    
    (6,250
    )
    
    
    (2,860
    )
    
    
    (8,234
    )
    
    
    
    (52,471
    )Estimated fair value
    
    
    
    (27,540
    )
    
    
    
    (4,200
    )
    
    
    (6,208
    )
    
    
    (3,290
    )
    
    
    (6,669
    )
    
    
    
    (47,907
    )
 26




---



##### 



Item 4. Controls and Procedures
   27




---



##### 



PART II
 Item 6. Exhibits
 2.1
    
    
    Plan of Arrangement, including exchangeable share provisions (incorporated herein
by reference to Exhibit 2.3 to the Companys Joint Proxy Statement/Prospectus on
Form S-4 (Reg. No. 333-73022)).3.1
    
    
    Restated Certificate of Incorporation of HEARx Ltd., including certain certificates
of designations, preferences and rights of certain preferred stock of the Company
(incorporated herein by reference to Exhibit 3 to the Companys Current Report on
Form 8-K, filed May 17, 1996 (File No. 001-11655)).3.2
    
    
    Amendment to the Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1A to the Companys Quarterly Report on Form 10-Q for the
period ended June 28, 1996 (File No. 001-11655)).3.3
    
    
    Amendment to Restated Certificate of Incorporation including one for ten reverse
stock split and reduction of authorized shares (incorporated herein to Exhibit 3.5
to the Companys Quarterly Report on Form 10-Q for the period ending July 2, 1999
(File No. 001-11655)).3.4
    
    
    Amendment to Restated Certificate of Incorporation including an increase in
authorized shares and change of name (incorporated herein by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K, filed July 17, 2002 (File No.
001-11655)).3.5
    
    
    Certificate of Designations, Preferences and Rights of the Companys 1999 Series H
Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4
to the Companys Current Report on Form 8-K, filed December 17, 1999 (File No.
001-11655)).3.6
    
    
    Certificate of Designations, Preferences and Rights of the Companys Special Voting
Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Companys
Current Report on Form 8-K, filed July 19, 2002 (File No. 001-11655)).3.7
    
    
    Amendment to Certificate of Designations, Preferences and Rights of the Companys
1999 Series H Junior Participating Preferred Stock (incorporated herein by
reference to Exhibit 4 to the Companys Current Report on Form 8-K, filed July 17,
2002 (File No. 001-11655)).3.8
    
    
    Certificate of Designations, Preferences and Rights of the Companys 1998-E
Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed August 28, 2003 (File No. 001-11655)).3.9
    
    
    Amendment of Restated Certificate of Incorporation (increasing authorized capital)
(incorporated herein by reference to Exhibit 3.9 to the Companys Quarterly Report
on Form 10-Q, filed August 8, 2004.)3.10
    
    
    Amended and Restated By-Laws of HearUSA, Inc. (effective May 9, 2005) (incorporated
herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K,
filed May 13, 2005).4.1
    
    
    Amended and Restated Rights Agreement, dated July 11, 2002 between HEARx and the
Rights Agent, which includes an amendment to the Certificate of Designations,
Preferences and Rights of the Companys 1999 Series H Junior Participating
Preferred Stock (incorporated herein by reference to Exhibit 4.9.1 to the Companys
Joint Proxy/Prospectus on Form S-4 (Reg. No. 333-73022)).4.2
    
    
    Form of Support Agreement among HEARx Ltd., HEARx Canada, Inc. and HEARx
Acquisition ULC (incorporated herein by reference to Exhibit 99.3 to the Companys
Joint Proxy Statement/Prospectus on Form S-4 (Reg No. 333-73022)).4.3
    
    
    Form of 2003 Convertible Subordinated Note due November 30, 2008 (incorporated
herein by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K,
filed December 31, 2003).9.1
    
    
    Form of Voting and Exchange Trust Agreement among HearUSA, Inc., HEARx Canada, Inc
and HEARx Acquisition ULC and ComputerShare Trust Company of Canada (incorporated
herein by reference to Exhibit 9.1 to the Companys Joint Proxy
Statement/Prospectus on Form S-4 (Reg. No. 333-73022)).31.1
    
    
    CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    CEO and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 28




---



##### 



SIGNATURES
    HearUSA Inc.
(Registrant)May 15, 2007/s/ Stephen J. HansbroughStephen J. HansbroughChief Executive Officer
HearUSA, Inc./s/ Gino ChouinardGino ChouinardChief Financial Officer
HearUSA, Inc. 29