##### 



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 endedSeptember 30, 2006
 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 or 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 Ö 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 large accelerated
filer in Rule 12b-2 of the Exchange act. (Check one):
 Large accelerated filer o Accelerated filer o Non-accelerated filer þ
 Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2
of the Exchange Act). Yes o No þ
 On November 2, 2006, 31,492,694 shares of the Registrants Common Stock and 767,358 exchangeable
shares of HEARx Canada, Inc. were outstanding.




---



##### 



INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations
Nine months ended September 30, 2006 and October 1, 2005
    
    
    4Consolidated Statements of Operations
Three months ended September 30, 2006 and October 1, 2005
    
    
    5Consolidated Statements of Cash Flows
Nine months ended September 30, 2006 and October 1, 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    32Signatures
    
    
    33
 2




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##### 



Part I  Financial Information
 Item 1. Financial Statements
 HearUSA, Inc.
Consolidated Balance Sheets
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETS (Note 3)Current assetsCash and cash equivalents
    
    $
    2,091,857
    
    
    $
    6,706,944Restricted cash and cash equivalents
    
    
    204,614
    
    
    
    431,000Accounts and notes receivable, less allowance for
doubtful accounts of $474,120 and $413,386
    
    
    7,552,738
    
    
    
    6,715,933Inventories
    
    
    2,644,717
    
    
    
    1,604,943Prepaid expenses and other
    
    
    930,978
    
    
    
    1,627,407Total current assets
    
    
    13,424,904
    
    
    
    17,086,227Property and equipment, net
    
    
    3,983,711
    
    
    
    3,437,436Goodwill (Note 3)
    
    
    46,852,879
    
    
    
    36,394,959Intangible assets, net (Note 3)
    
    
    12,787,051
    
    
    
    11,477,290Deposits and other
    
    
    655,210
    
    
    
    585,633Total Assets
    
    $
    77,703,755
    
    
    $
    68,981,545LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    9,589,468
    
    
    $
    8,499,812Accrued expenses
    
    
    2,982,849
    
    
    
    2,344,419Accrued salaries and other compensation
    
    
    2,290,538
    
    
    
    2,589,877Current maturities of long-term debt
    
    
    6,958,937
    
    
    
    5,192,108Current maturities of convertible subordinated notes, net of debt discount
of $1,335,949 and $1,847,853
    
    
    1,789,051
    
    
    
    652,147Current maturities of subordinated notes, net of debt discount of $556,257
and $868,345
    
    
    1,203,743
    
    
    
    891,655Dividends payable
    
    
    33,785
    
    
    
    34,562Total current liabilities
    
    
    24,848,371
    
    
    
    20,204,580Long-term debt (Notes 3 and 4)
    
    
    25,457,839
    
    
    
    19,970,099Convertible subordinated notes net of debt discount of $601,446 and
$1,565,187 (Note 5)
    
    
    2,523,554
    
    
    
    3,434,813Subordinated notes net of debt discount of $134,169 and $512,350 (Note 6)
    
    
    1,845,831
    
    
    
    2,787,650Warrant liability (Note 6)
    
    
    179,811
    
    
    
    1,347,217Total long-term liabilities
    
    
    30,007,035
    
    
    
    27,539,779Commitments and contingencies
    
    
    
    
    
    
    Minority interest in net income of consolidated subsidiary
    
    
    383,535
    
    
    
    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)
    
    
    233
    
    
    
    233Total preferred stock
    
    
    233
    
    
    
    233Common stock: $.10 par; 75,000,000 shares authorized
32,016,350 and 31,893,200 shares issued
    
    
    3,201,635
    
    
    
    3,189,320Stock subscription
    
    
    (412,500
    )
    
    
    (412,500
    )Additional paid-in capital
    
    
    123,707,174
    
    
    
    121,934,658Accumulated deficit
    
    
    (104,305,494
    )
    
    
    (103,252,279
    )Accumulated other comprehensive income
    
    
    2,758,907
    
    
    
    2,262,895Treasury stock, at cost: 523,662 common shares
    
    
    (2,485,141
    )
    
    
    (2,485,141
    )Total stockholders equity
    
    
    22,464,814
    
    
    
    21,237,186Total Liabilities and Stockholders Equity
    
    $
    77,703,755
    
    
    $
    68,981,545
 See accompanying notes to the consolidated financial statements
 3




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Nine Months Ended September 30, 2006 and October 1, 2005
 Nine Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Net revenuesHearing aids and other products
    
    $
    61,553,966
    
    
    $
    53,706,549Services
    
    
    4,396,675
    
    
    
    3,995,852Total net revenues
    
    
    65,950,641
    
    
    
    57,702,401Operating costs and expensesHearing aids and other products (Note 4)
    
    
    18,676,853
    
    
    
    15,692,130Services
    
    
    1,298,074
    
    
    
    1,342,226Total cost of products sold and services
    
    
    19,974,927
    
    
    
    17,034,356Center operating expenses
    
    
    30,663,419
    
    
    
    26,929,214General and administrative expenses (including approximately
$721,000 non- cash employee stock-based compensation
expense in 2006  Notes 1 and 7)
    
    
    10,127,438
    
    
    
    8,848,091Depreciation and amortization
    
    
    1,477,085
    
    
    
    1,446,203Total operating costs and expenses
    
    
    62,242,869
    
    
    
    54,257,864Income from operations
    
    
    3,707,772
    
    
    
    3,444,537Non-operating income (expense):Gain from insurance proceeds
    
    
    202,936
    
    
    
    430,122Interest income
    
    
    109,929
    
    
    
    52,180Interest expense (including approximately $1,978,000 and
$1,789,000 of non-cash debt discount amortization and
approximately $(250,000) and $76,000 in non-cash interest (income)
expense related to the change in the fair value of the warrant
liability  Notes 4, 5 and 6)
    
    
    (4,436,120
    )
    
    
    (3,671,029
    )Minority interest in net income of consolidated subsidiary (Note 1)
    
    
    (383,535
    )
    
    
    Income (loss) from continuing operations before income taxes
    
    
    (799,018
    )
    
    
    255,810Income taxes
    
    
    (150,900
    )
    
    
    Net income (loss) from continuing operations
    
    
    (949,918
    )
    
    
    255,810Discontinued operations (Note 2):Gain on disposition of assets
    
    
    
    
    
    
    365,158Net loss from discontinued operations
    
    
    
    
    
    
    (406,662
    )Total net income from discontinued operations
    
    
    
    
    
    
    (41,504
    )Net income (loss)
    
    
    (949,918
    )
    
    
    214,306Dividends on preferred stock
    
    
    (103,297
    )
    
    
    (666,113
    )Net loss applicable to common stockholders
    
    $
    (1,053,215
    )
    
    $
    (451,807
    )Net income (loss) from continuing operations, after dividends on
preferred stock, applicable to common stockholders per common share
 basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.01
    )Net loss applicable to common stockholders per common share basic
and diluted
    
    $
    (0.03
    )
    
    $
    (0.01
    )Weighted average number of shares of common stock outstanding 
basic and diluted
    
    
    32,211,925
    
    
    
    31,452,690
 See accompanying notes to the consolidated financial statements
 4




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended September 30, 2006 and October 1, 2005
 Three Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Net revenuesHearing aids and other products
    
    $
    20,518,338
    
    
    $
    18,362,752Services
    
    
    1,523,182
    
    
    
    1,252,803Total net revenues
    
    
    22,041,520
    
    
    
    19,615,555Operating costs and expensesHearing aids and other products (Note 4)
    
    
    6,490,501
    
    
    
    5,624,739Services
    
    
    511,084
    
    
    
    507,152Total cost of products sold and services
    
    
    7,001,585
    
    
    
    6,131,891Center operating expenses
    
    
    10,598,402
    
    
    
    8,868,510General and administrative expenses (including approximately
$247,000 non-cash employee stock-based compensation expense in 2006
 Notes 1 and 7)
    
    
    3,539,613
    
    
    
    2,882,357Depreciation and amortization
    
    
    497,460
    
    
    
    471,116Total operating costs and expenses
    
    
    21,637,060
    
    
    
    18,353,874Income from operations
    
    
    404,460
    
    
    
    1,261,681Non-operating income (expense):Gain from insurance proceeds
    
    
    145,779
    
    
    
    300,527Interest income
    
    
    18,739
    
    
    
    22,582Interest expense (including approximately $601,000 and $649,000 of
non-cash debt discount amortization and approximately $67,000
and $76,000 in non-cash addition in interest expense for the change
in the fair value of the warrant liability Notes 4, 5 and 6)
    
    
    (1,638,389
    )
    
    
    (1,310,053
    )Minority interest in net income of consolidated subsidiary
    
    
    (321,897
    )
    
    
    Income (loss) from continuing operations before income taxes
    
    
    (1,391,308
    )
    
    
    274,737Income taxes
    
    
    (84,750
    )
    
    
    Net income (loss) from continuing operations
    
    
    (1,476,058
    )
    
    
    274,737Discontinued operations (Note 2):Net loss from discontinued operations
    
    
    
    
    
    
    (140,155
    )Net income (loss)
    
    
    (1,476,058
    )
    
    
    134,582Dividends on preferred stock
    
    
    (33,785
    )
    
    
    (299,035
    )Net loss applicable to common stockholders
    
    $
    (1,509,843
    )
    
    $
    (164,453
    )Net income (loss) from continuing operations after dividends on
preferred stock, applicable to common stockholders per common share
 basic
    
    $
    (0.05
    )
    
    $
    0.00Net income (loss) from continuing operations after dividends on
preferred stock, applicable to common stockholders per common share
 diluted
    
    $
    (0.05
    )
    
    $
    0.00Net loss applicable to common stockholders per common share  basic
    
    $
    (0.05
    )
    
    $
    (0.00
    )Net loss applicable to common stockholders per common share  diluted
    
    $
    (0.05
    )
    
    $
    (0.00
    )Weighted average number of shares of common stock outstanding 
basic and diluted
    
    
    32,259,927
    
    
    
    32,033,447
 See accompanying notes to the consolidated financial statements
 5




---



##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and October 1, 2005
 September 30,
    
    
    October 1,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    (949,918
    )
    
    $
    214,306Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Debt discount amortization
    
    
    1,978,210
    
    
    
    1,758,771Depreciation and amortization
    
    
    1,477,085
    
    
    
    1,446,203Interest on Siemens Tranches
    
    
    997,467
    
    
    
    632,533Employee stock-based compensation
    
    
    721,085
    
    
    
    Minority interest in income of consolidated subsidiary
    
    
    383,535
    
    
    
    Provision for doubtful accounts
    
    
    271,000
    
    
    
    266,554Net loss from discontinued operations
    
    
    
    
    
    
    41,504Consulting expense-stock-based
    
    
    20,767
    
    
    
    Principal payments on long-term debt made through
preferred pricing reductions
    
    
    (2,275,540
    )
    
    
    (2,192,336
    )Increase (decrease) in fair value of warrant liability
    
    
    (249,542
    )
    
    
    75,882Other
    
    
    
    
    
    
    (30,551
    )(Increase) decrease in:Accounts and notes receivable
    
    
    (997,514
    )
    
    
    (904,202
    )Inventories
    
    
    (1,035,777
    )
    
    
    (186,834
    )Prepaid expenses and other
    
    
    695,878
    
    
    
    (490,066
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    1,770,254
    
    
    
    574,679Accrued salaries and other compensation
    
    
    (308,468
    )
    
    
    196,070Net cash provided by continuing operations
    
    
    2,498,522
    
    
    
    1,402,513Net cash used in discontinued operations
    
    
    
    
    
    
    (301,244
    )Net cash provided by operating activities
    
    
    2,498,522
    
    
    
    1,101,269Cash flows from investing activitiesPurchase of property and equipment-continuing operations
    
    
    (1,069,143
    )
    
    
    (781,117
    )Purchase of property and equipment-discontinued operations
    
    
    
    
    
    
    (13,332
    )Business acquisitions
    
    
    (6,648,575
    )
    
    
    (1,282,303
    )Proceeds from sales of discontinued operations
    
    
    
    
    
    
    1,101,385Proceeds from redemption of certificates of deposit
    
    
    226,386
    
    
    
    Net cash used in investing activities
    
    
    (7,491,332
    )
    
    
    (975,367
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    5,208,045
    
    
    
    Proceeds from issuance of subordinated notes
    
    
    
    
    
    
    5,170,000Principal payments on long-term debt
    
    
    (2,146,070
    )
    
    
    (1,072,857
    )Principal payments on convertible subordinated notes
    
    
    (1,250,000
    )
    
    
    Principal payments on subordinated notes
    
    
    (1,320,000
    )
    
    
    Proceeds from the exercise of warrants
    
    
    
    
    
    
    1,725,000Proceeds from the exercise of employee stock options
    
    
    116
    
    
    
    68,004Cost of exchange and redemption of capital stock
    
    
    
    
    
    
    (4,928,041
    )Dividends paid on preferred stock
    
    
    (104,074
    )
    
    
    (591,428
    )Net cash provided by financing activities
    
    
    388,017
    
    
    
    370,678Effects of exchange rate changes on cash
    
    
    (10,294
    )
    
    
    40,810Net increase (decrease) in cash and cash equivalents
    
    
    (4,615,087
    )
    
    
    537,390Cash and cash equivalents at beginning of period
    
    
    6,706,944
    
    
    
    2,615,379Cash and cash equivalents at end of period
    
    $
    2,091,857
    
    
    $
    3,152,769
 See accompanying notes to consolidated financial statements
 6




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##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and October 1, 2005
 September 30,
    
    
    October 1,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    1,015,000
    
    
    $
    1,022,993Cash paid for income taxes
    
    $
    96,900
    
    
    $
    Supplemental schedule of non-cash investing and financing activities:Principal payments of long-term debt through preferred pricing
reductions
    
    $
    2,275,540
    
    
    $
    2,192,336Issuance of notes payable in exchange for business acquisitions
    
    $
    5,460,000
    
    
    $
    2,150,000Capital lease of property and equipment
    
    $
    
    
    
    $
    41,501
 See accompanying notes to consolidated financial statements
 7




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##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
  1. Description of the Company and Summary of Significant Accounting Policies
 The Company
  Basis of consolidation
   Fiscal year
  Net income (loss) per common share
  8




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##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
   Comprehensive income (loss)
   Nine Months Ended
    
    Three Months EndedSeptember 30,
    
    October 1,
    
    September 30,
    
    October 1,2006
    
    2005
    
    2006
    
    2005Net income (loss) for the period
    
    $
    (949,918
    )
    
    $
    214,306
    
    
    $
    (1,476,058
    )
    
    $
    134,582Other comprehensive income:Foreign currency translation
adjustments
    
    
    496,012
    
    
    
    631,188
    
    
    
    (19,314
    )
    
    
    724,825Comprehensive income (loss) for
the period
    
    $
    (453,906
    )
    
    $
    845,494
    
    
    $
    (1,495,372
    )
    
    $
    859,407
 Stock-based compensation
   9




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##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
  Reclassifications
  2. Discontinued Operations
    Nine months
    
    Three monthsended
    
    endedOctober 1, 2005
    
    October 1, 2005Net revenues of discontinued operations
    
    $
    1,862,000
    
    
    $
    0Net loss of discontinued operations
    
    $
    407,000
    
    
    $
    107,000Net loss from discontinued operations
applicable to common stockholders per
common share  basic
    
    $
    (0.00
    )
    
    $
    (0.00
    )Net loss from discontinued operations
applicable to common stockholders per
common share  diluted
    
    $
    (0.00
    )
    
    $
    (0.00
    )
 3. Business Acquisitions
  10




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
   4. Long-term Debt (also see Notes 5 and 6)
  September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)Notes payable to Siemens  see below:Tranche A
    
    $
    49,850
    
    
    $
    2,239,851Tranche B (Note 3)
    
    
    2,670,061
    
    
    
    Tranche C (includes $1,998,666 and
$1,298,865 of accrued
interest)
    
    
    23,307,237
    
    
    
    20,875,256Total notes payable to Siemens
    
    
    26,027,148
    
    
    
    23,115,107Notes payable to others (Note 3)
    
    
    6,389,628
    
    
    
    2,047,10032,416,776
    
    
    
    25,162,207Less current maturities
    
    
    6,958,937
    
    
    
    5,192,108$
    25,457,839
    
    
    $
    19,970,099
     11




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
     Nine Months Ended
    
    Three Months EndedSeptember 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Portion applied
against quarterly
principal payments
    
    $
    2,276,000
    
    
    $
    2,192,000
    
    
    $
    803,000
    
    
    $
    730,000Portion applied
against quarterly
interest payments
    
    $
    178,000
    
    
    $
    292,000
    
    
    $
    68,000
    
    
    $
    86,000Preferred pricing
reductions recorded
as a reduction of
cost of products
sold
    
    $
    (2,454,000
    )
    
    $
    (2,484,000
    )
    
    $
    (871,000
    )
    
    $
    (816,000
    )
   12




---



##### 

\

HearUSA, Inc
Notes to Consolidated Financial Statements
  5. Convertible Subordinated Notes
      6. Subordinated Notes and Warrant Liability
  13




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
       7. Stock-based Benefit Plans
 The 1987 Stock Option Plan
  14




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
  The 1995 Flexible Stock Plan
  The 2002 Flexible Stock Plan
  Impact of the Adoption of SFAS 123(R)
  Valuation Assumptions
  15




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
 Nine Months EndedSeptember 30,
    
    October 1,2006
    
    2005Risk free interest rate
    
    
    5.02% - 5.12
    %
    
    
    4.04
    %Expected life in years
    
    
    10
    
    
    
    7 - 10Expected volatility
    
    
    88
    %
    
    
    95
    %
 Stock-based Payment Award Activity
  WeightedAverageWeighted
    
    RemainingAverage
    
    Contractual Term
    
    AggregateShares
    
    Exercise
    
    (in years)
    
    Intrinsic ValueOutstanding at beginning of year
    
    
    5,258,770
    
    
    $
    1.36Granted
    
    
    225,000
    
    
    $
    1.26Exercised
    
    
    150
    
    
    $
    0.77Forfeited /expired/cancelled
    
    
    66,994
    
    
    $
    6.45Outstanding at September 30, 2006
    
    
    5,416,626
    
    
    $
    1.30
    
    
    
    6.76
    
    
    $
    3,169,253Vested and expected to vest at
September 30, 2006
    
    
    5,416,626
    
    
    $
    1.30
    
    
    
    6.76
    
    
    $
    3,169,253Exercisable at September 30, 2006
    
    
    3,277,876
    
    
    $
    1.35
    
    
    
    5.98
    
    
    $
    2,138,991
   Weighted AverageGrant-DateShares
    
    Fair ValueNon-vested at January 1, 2006
    
    
    2,992,826
    
    
    $
    0.98Granted
    
    
    225,000
    
    
    $
    1.10Vested
    
    
    (1,066,576
    )
    
    $
    0.91Forfeited unvested
    
    
    (12,500
    )
    
    $
    0.57Non-vested at September 30, 2006
    
    
    2,138,750
    
    
    $
    0.91
 16




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
 Pro forma Information for Periods Prior to the Adoption of SFAS 123(R
   Nine Months Ended
    
    Three Months EndedOctober 1,
    
    October 1,2005
    
    2005Net loss applicable to common stockholders as reported
    
    $
    (451,807
    )
    
    $
    (164,453
    )Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of tax effects
    
    
    (1,137,000
    )
    
    
    (390,000
    )Pro forma, net loss
    
    $
    (1,588,807
    )
    
    $
    (554,453
    )Loss per share-basicBasic and diluted-as reported
    
    $
    (0.01
    )
    
    $
    (0.00
    )Basic and diluted-pro forma
    
    $
    (0.05
    )
    
    $
    (0.02
    )
 8. Segments
  17




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##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
  Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalFor the nine months ended:Hearing aids and other products revenuesSeptember 30, 2006
    
    $
    61,504,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    $
    61,554,000October 1, 2005
    
    $
    53,642,000
    
    
    $
    65,000
    
    
    
    
    
    
    
    
    
    
    $
    53,707,000Service revenuesSeptember 30, 2006
    
    $
    3,275,000
    
    
    
    
    
    
    $
    1,122,000
    
    
    
    
    
    
    $
    4,397,000October 1, 2005
    
    $
    2,864,000
    
    
    
    
    
    
    $
    1,132,000
    
    
    
    
    
    
    $
    3,996,000Income (loss) from operationsSeptember 30, 2006
    
    $
    13,460,000
    
    
    $
    (110,000
    )
    
    $
    631,000
    
    
    $
    (10,273,000
    )
    
    $
    3,708,000October 1, 2005
    
    $
    12,111,000
    
    
    $
    (51,000
    )
    
    $
    385,000
    
    
    $
    (9,000,000
    )
    
    $
    3,445,000As of and for the nine months ended:September 30, 2006Depreciation and
amortization
    
    $
    1,328,000
    
    
    
    
    
    
    $
    3,000
    
    
    $
    146,000
    
    
    $
    1,477,000Total assets
    
    $
    62,168,000
    
    
    
    
    
    
    $
    933,000
    
    
    $
    14,603,000
    
    
    $
    77,704,000Capital expenditures
    
    $
    580,000
    
    
    
    
    
    
    
    
    
    
    $
    489,000
    
    
    $
    1,069,000October 1, 2005Depreciation and
amortization
    
    $
    1,290,000
    
    
    
    
    
    
    $
    4,000
    
    
    $
    152,000
    
    
    $
    1,446,000Total assets
    
    $
    49,932,000
    
    
    
    
    
    
    $
    1,273,000
    
    
    $
    13,019,000
    
    
    $
    64,224,000Capital expenditures
    
    $
    659,000
    
    
    
    
    
    
    
    
    
    
    $
    135,000
    
    
    $
    794,000
  Nine months ended2006
    
    2005Hearing aid revenues
    
    
    95.9
    %
    
    
    95.5
    %Other products revenues
    
    
    4.1
    %
    
    
    4.5
    %
  Nine months ended2006
    
    2005Hearing aid repairs
    
    
    52.4
    %
    
    
    52.5
    %Testing and other income
    
    
    47.6
    %
    
    
    47.5
    %
  Nine months ended2006
    
    2005General and administrative expenses
    
    $
    (10,127,000
    )
    
    $
    (8,848,000
    )Deprecation and amortization
    
    
    (146,000
    )
    
    
    (152,000
    )Corporate loss from operations
    
    $
    (10,273,000
    )
    
    $
    (9,000,000
    )
 18




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
   United States
    
    
    Canada
    
    
    United States
    
    
    Canada2006
    
    
    2006
    
    
    2005
    
    
    2005$
    
    
    $
    
    
    $
    
    
    $Hearing aid and
other product
revenues
    
    
    54,596,000
    
    
    
    6,958,000
    
    
    
    47,835,000
    
    
    
    5,872,000Service revenues
    
    
    4,076,000
    
    
    
    321,000
    
    
    
    3,693,000
    
    
    
    303,000Long-lived assets
    
    
    52,482,000
    
    
    
    11,797,000
    
    
    
    41,406,000
    
    
    
    10,300,000Total assets
    
    
    63,656,000
    
    
    
    14,048,000
    
    
    
    51,371,000
    
    
    
    12,853,000
 9. Recent Accounting Pronouncements
    10. Liquidity
  19




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
  11. Subsequent events
  20




---



##### 



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 remainder of the year; belief; expectation that income from
operations will continue to improve as revenues increase; long-term target is to achieve income
from operations, as a percent of total net revenues, of 10% to 12%; expectation that in the
remainder of 2006 the cost of products sold as a percent of revenues will be consistent with the
first nine months of 2006; 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 revenues; expectation that additional funds will be used for acquisitions during the
remainder of the year and that a portion of those funds will be drawn from the Siemens line of
credit; expectations that capital expenditures for the fourth quarter of 2006 will be consistent
with the first three quarters of 2006; expectations that once fully integrated the acquisitions
will contribute positively to the performance of the Company. 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 those
risks described in the Companys annual report on Form 10-K/A for fiscal 2005 filed with the
Securities and Exchange Commission. We do not intend to update publicly any forward-looking
statements whether as a result of new information, future events or otherwise.
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 GENERAL
    21




---



##### 



22




---



##### 



RESULTS OF OPERATIONS
 For the three months ended September 30, 2006 compared to the three months ended October 1,
2005
       23




---



##### 



For the Nine Months Ended September 30, 2006 compared to the Nine Months Ended October 1,
2005
    24




---



##### 



25




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
     26




---



##### 



27




---



##### 



.
   Payments due by period (000s)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    Than 5Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    yearsContractual obligationsLong-term debt (1)
    
    $
    32,417
    
    
    $
    6,959
    
    
    $
    12,907
    
    
    $
    9,661
    
    
    $
    2,890Convertible subordinated notes (3)
    
    
    6,250
    
    
    
    3,125
    
    
    
    3,125
    
    
    
    
    
    
    
    Subordinated notes
    
    
    3,740
    
    
    
    1,760
    
    
    
    1,980
    
    
    
    
    
    
    
    Subtotal of obligations recorded on balance sheet
    
    
    42,407
    
    
    
    11,844
    
    
    
    18,012
    
    
    
    9,661
    
    
    
    2,890Interest to be paid on long-term debt (2)
    
    
    1,669
    
    
    
    732
    
    
    
    818
    
    
    
    119
    
    
    
    Interest to be paid on convertible subordinated
notes (3)
    
    
    525
    
    
    
    360
    
    
    
    165
    
    
    
    
    
    
    
    Interest to be paid on subordinated notes
    
    
    282
    
    
    
    206
    
    
    
    76
    
    
    
    
    
    
    
    Operating leases
    
    
    19,678
    
    
    
    2,079
    
    
    
    12,348
    
    
    
    3,314
    
    
    
    1,937Employment agreements
    
    
    4,620
    
    
    
    1,766
    
    
    
    2,359
    
    
    
    495
    
    
    
    Purchase obligations
    
    
    789
    
    
    
    639
    
    
    
    150
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    69,970
    
    
    $
    17,626
    
    
    $
    33,928
    
    
    $
    13,589
    
    
    $
    4,827
 28




---



##### 



(1)
    
    Approximately $20.2 million can be repaid through preferred pricing reductions from
Siemens, including $3.5 million in less than 1 year and $7.0 million in years 1-3, $6.7
million in years 4-5 and $1.2 million in more than 5 years.(2)
    
    Interest on long-term debt excludes the interest on the new Tranches A, B and C that can be
repaid through preferred pricing reductions from Siemens pursuant to the Amended and Restated
Credit Agreement. Interest repaid through preferred pricing reductions was $178,000 in the
first nine months
of 2006. (See Note 4a  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
  Goodwill
  Revenue recognition
   Allowance for doubtful accounts
  29




---



##### 



Sales returns
  RECENT ACCOUNTING PRONOUNCEMENTS
    30




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Variable Rate
    
    
    
    Fixed Rate
    
    
    
    TotalPrime+1%
    
    
    
    10% note
    
    
    8%
    
    
    7%due February
    
    
    
    Due February
    
    
    due November
    
    
    due August2011
    
    
    
    2011
    
    
    2008
    
    
    2008
    
    
    Other$
    
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    
    $(000s)
    
    
    
    (000s)
    
    
    (000s)
    
    
    (000s)
    
    
    (000s)
    
    
    
    (000s)2006
    
    
    
    (973
    )
    
    
    
    (197
    )
    
    
    (1,250
    )
    
    
    (440
    )
    
    
    (528
    )
    
    
    
    (3,388
    )2007
    
    
    
    (4,105
    )
    
    
    
    (592
    )
    
    
    (2,500
    )
    
    
    (1,760
    )
    
    
    (2,280
    )
    
    
    
    (11,237
    )2008
    
    
    
    (4,195
    )
    
    
    
    (594
    )
    
    
    (2,500
    )
    
    
    (1,540
    )
    
    
    (1,828
    )
    
    
    
    (10,657
    )2009
    
    
    
    (4,295
    )
    
    
    
    (594
    )
    
    
    
    
    
    
    
    
    
    
    (1,239
    )
    
    
    
    (6,128
    )2010
    
    
    
    (8,496
    )
    
    
    
    (1,986
    )
    
    
    
    
    
    
    
    
    
    
    (515
    )
    
    
    
    (10,997
    )Total
    
    
    
    (22,064
    )
    
    
    
    (3,963
    )
    
    
    (6,250
    )
    
    
    (3,740
    )
    
    
    (6,390
    )
    
    
    
    (42,407
    )Estimated fair value
    
    
    
    (19,586
    )
    
    
    
    (3,195
    )
    
    
    (6,208
    )
    
    
    (3,623
    )
    
    
    (5,992
    )
    
    
    
    (38,604
    )
 Item 4. Controls and Procedures
   31




---



##### 



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).10.1
    
    Amended and Restated Credit Agreement, dated as of August 25, 2006, between
HearUSA, Inc and Siemens Hearing Instruments, Inc.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
 32




---



##### 



SIGNATURES
  HearUSA Inc.
(Registrant)November 14, 2006/s/Stephen J. HansbroughStephen J. HansbroughPresident/Chief Executive Officer
HearUSA, Inc./s/Gino ChouinardGino ChouinardEVP/Chief Financial Officer
HearUSA, Inc. 33