##### 



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 April 1, 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 of Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 1250 Northpoint Parkway, West Palm Beach, Florida
    
    33407(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code (561) 478-8770
 
 Former Name, Former Address and Former Fiscal Year,
 if Changed Since Last Report
 Indicate
by check þ whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and non-accelerated
filer in Rule 12b-2 of the Exchange act. (Check one):
 Large accelerated filero
    
    Accelerated filero
    
    Non-accelerated filerþ
 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 April 25, 2006, 31,379,538 shares of the Registrants Common Stock and 780,358 exchangeable
shares of HEARx Canada, Inc. were outstanding.




---



##### 



INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance SheetsApril 1, 2006 and December 31, 2005
    
    
    3Consolidated Statements of OperationsThree months ended April 1, 2006 and April 2, 2005
    
    
    4Consolidated Statements of Cash FlowsThree months ended April 1, 2006 and April 2, 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and
Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    26Signatures
    
    
    28




---



##### 



Part
I  Financial Information
 Item 1. Financial Statements
 HearUSA, Inc.
Consolidated Balance Sheets
 April 1,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETS (Note 4)Current assetsCash and cash equivalents
    
    $
    4,117,615
    
    
    $
    6,706,944Restricted cash and cash equivalents
    
    
    444,850
    
    
    
    431,000Accounts and notes receivable, less allowance for
doubtful accounts of $446,781 and $413,386
    
    
    5,985,300
    
    
    
    6,715,933Inventories
    
    
    2,068,548
    
    
    
    1,604,943Prepaid expenses and other
    
    
    1,557,413
    
    
    
    1,627,407Total current assets
    
    
    14,173,726
    
    
    
    17,086,227Property and equipment, net
    
    
    3,619,686
    
    
    
    3,474,381Goodwill (Note 3)
    
    
    38,956,076
    
    
    
    36,394,959Intangible assets, net
    
    
    11,341,185
    
    
    
    11,440,345Deposits and other
    
    
    571,666
    
    
    
    585,633Total Assets
    
    $
    68,662,339
    
    
    $
    68,981,545LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    7,798,690
    
    
    $
    8,499,812Accrued expenses
    
    
    2,465,513
    
    
    
    2,344,419Accrued salaries and other compensation
    
    
    2,396,953
    
    
    
    2,589,877Current maturities of long-term debt
    
    
    5,447,565
    
    
    
    5,192,108Current maturities of convertible subordinated notes, net of debt discount of
$1,676,556 and $1,847,853
    
    
    823,444
    
    
    
    652,147Current maturities of subordinated notes, net of debt discount of $742,591 and $868,345
    
    
    1,017,409
    
    
    
    891,655Dividends payable
    
    
    34,950
    
    
    
    34,562Total current liabilities
    
    
    19,984,524
    
    
    
    20,204,580Long-term debt (Notes 3 and 4)
    
    
    20,130,829
    
    
    
    19,970,099Convertible subordinated notes, net of debt discount of $1,203,082 and $1,565,187
(Note 5)
    
    
    3,171,917
    
    
    
    3,434,813Subordinated notes, net of debt discount of $382,007 and $512,350 (Note 6)
    
    
    2,477,993
    
    
    
    2,787,650Warrant liability (Note 6)
    
    
    1,175,550
    
    
    
    1,347,217Total long-term liabilities
    
    
    26,956,289
    
    
    
    27,539,779Commitments 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)
    
    
    233
    
    
    
    233Total preferred stock
    
    
    233
    
    
    
    233Common stock: $.10 par; 75,000,000 shares authorized 31,903,200 and 31,893,200 shares
issued
    
    
    3,190,320
    
    
    
    3,189,320Stock subscription
    
    
    (412,500
    )
    
    
    (412,500
    )Additional paid-in capital
    
    
    122,173,005
    
    
    
    121,934,658Accumulated deficit
    
    
    (102,982,250
    )
    
    
    (103,252,279
    )Accumulated other comprehensive income
    
    
    2,237,859
    
    
    
    2,262,895Treasury stock, at cost: 523,662 common shares
    
    
    (2,485,141
    )
    
    
    (2,485,141
    )Total stockholders equity
    
    
    21,721,526
    
    
    
    21,237,186Total Liabilities and Stockholders Equity
    
    $
    68,662,339
    
    
    $
    68,981,545
 See accompanying notes to the consolidated financial statements
 3




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended April 1, 2006 and April 2, 2005
 April 1,
    
    
    April 2,2006
    
    
    2005(unaudited)
    
    (unaudited)Net revenuesHearing aids and other products
    
    $
    20,289,349
    
    
    $
    17,597,626Services
    
    
    1,367,965
    
    
    
    1,432,959Total net revenues
    
    
    21,657,314
    
    
    
    19,030,585Operating costs and expensesHearing aids and other products (Note 4)
    
    
    6,112,568
    
    
    
    4,917,507Services
    
    
    372,783
    
    
    
    447,775Total cost of products sold and services
    
    
    6,485,351
    
    
    
    5,365,282Center operating expenses
    
    
    9,767,320
    
    
    
    9,203,466General and administrative expenses (including approximately
$233,000 non-cash employee stock-based compensation expense in 2006)
(Notes 1 and 7)
    
    
    3,239,204
    
    
    
    2,963,956Depreciation and amortization
    
    
    492,145
    
    
    
    482,907Total operating costs and expenses
    
    
    19,984,020
    
    
    
    18,015,611Income from operations
    
    
    1,673,294
    
    
    
    1,014,974Non-operating income (expense):Gain from insurance proceeds
    
    
    57,157
    
    
    
    Interest income
    
    
    22,825
    
    
    
    12,683Interest expense (including approximately $726,000 and $568,000 of
non-cash debt discount amortization and approximately $172,000 in
non-cash reduction in interest expense for the decrease in the fair
value of the warrant liability) (Notes 4, 5 and 6)
    
    
    (1,410,147
    )
    
    
    (1,183,617
    )Income (loss) from continuing operations before income taxes
    
    
    343,129
    
    
    
    (155,960
    )Income taxes
    
    
    (38,150
    )
    
    
    Net income (loss) from continuing operations
    
    
    304,979
    
    
    
    (155,960
    )Loss from discontinued operations (Note 2)
    
    
    
    
    
    
    (95,478
    )Net income (loss)
    
    
    304,979
    
    
    
    (251,438
    )Dividends on preferred stock
    
    
    (34,950
    )
    
    
    (193,630
    )Net income (loss) applicable to common stockholders
    
    $
    270,029
    
    
    $
    (445,068
    )Net income (loss) from continuing operations, including dividends on
preferred stock, applicable to common stockholders  basic
    
    $
    0.01
    
    
    $
    (0.01
    )Net Income (loss) from continuing operations, including dividends on
preferred stock, applicable to common stockholders  diluted
    
    $
    0.01
    
    
    $
    (0.01
    )Net income (loss) applicable to common stockholders per common share
 basic
    
    $
    0.01
    
    
    $
    (0.01
    )Net income (loss) applicable to common stockholders per common share
 diluted
    
    $
    0.01
    
    
    $
    (0.01
    )Weighted average number of shares of common stock outstanding  basic
    
    
    32,159,902
    
    
    
    30,516,331Weighted average number of shares of common stock outstanding 
diluted
    
    
    38,825,085
    
    
    
    30,516,331
 See accompanying notes to the consolidated financial statements
 4




---



##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Three Months Ended April 1, 2006 and April 2, 2005
 April 1,
    
    
    April 2,2006
    
    
    2005(unaudited)
    
    (unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    304,979
    
    
    $
    (251,438
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Debt discount amortization
    
    
    725,682
    
    
    
    568,223Depreciation and amortization
    
    
    492,145
    
    
    
    482,907Interest on Siemens Tranche C
    
    
    296,163
    
    
    
    206,085Employee stock-based compensation
    
    
    232,605
    
    
    
    Provision for doubtful accounts
    
    
    91,000
    
    
    
    99,644Loss from discontinued operations
    
    
    
    
    
    
    95,478Consulting expense
    
    
    6,740
    
    
    
    6,740Loss (gain) on the disposition of property and equipment
    
    
    5,668
    
    
    
    (60,437
    )Principal payments on long-term debt made through
preferred pricing reductions
    
    
    (730,000
    )
    
    
    (730,201
    )Decrease in fair value of warrant liability
    
    
    (171,667
    )
    
    
    Other
    
    
    (13,552
    )
    
    
    (Increase) decrease in:Accounts and notes receivable
    
    
    634,809
    
    
    
    197,612Inventories
    
    
    (463,598
    )
    
    
    160,832Prepaid expenses and other
    
    
    108,894
    
    
    
    (565,131
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (516,988
    )
    
    
    (319,345
    )Accrued salaries and other compensation
    
    
    (192,509
    )
    
    
    115,085Net cash provided by continuing operations
    
    
    810,371
    
    
    
    6,054Net cash used in discontinued operations
    
    
    
    
    
    
    (55,823
    )Net cash provided by (used in) operating activities
    
    
    810,371
    
    
    
    (49,769
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (445,039
    )
    
    
    (189,696
    )Capital expenditures from discontinued operations
    
    
    
    
    
    
    (10,851
    )Business acquisitions
    
    
    (1,426,846
    )
    
    
    Net cash used in investing activities
    
    
    (1,871,885
    )
    
    
    (200,547
    )Cash flows from financing activitiesPrincipal payments on long-term debt
    
    
    (421,951
    )
    
    
    (206,094
    )Principal payments on convertible subordinated notes
    
    
    (625,000
    )
    
    
    Principal payments on subordinated notes
    
    
    (440,000
    )
    
    
    Proceeds from the exercise of warrants
    
    
    
    
    
    
    1,725,000Dividends paid on preferred stock
    
    
    (34,950
    )
    
    
    (265,430
    )Net cash provided by (used in) financing activities
    
    
    (1,521,901
    )
    
    
    1,253,476Effects of exchange rate changes on cash
    
    
    (5,914
    )
    
    
    13,900Net increase (decrease) in cash and cash equivalents
    
    
    (2,589,329
    )
    
    
    1,017,060Cash and cash equivalents at beginning of period
    
    
    6,706,944
    
    
    
    2,615,379Cash and cash equivalents at end of period
    
    $
    4,117,615
    
    
    $
    3,632,439
 5




---



##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Three Months Ended April 1, 2006 and April 2, 2005
 April 1,
    
    
    April 2,2006
    
    
    2005(unaudited)
    
    (unaudited)Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    434,000
    
    
    $
    266,000Supplemental schedule of non-cash investing and financing
activities:Principal payments on long-term debt through preferred pricing
reductions
    
    $
    730,000
    
    
    $
    730,201Issuance of notes payable in exchange for business acquisitions
    
    $
    1,272,000
    
    
    $
    
 See accompanying notes to consolidated financial statements
 6




---



##### 



1. Description of the Company and Summary of Significant Accounting Policies
 The Company
  Basis of consolidation
  Fiscal year
  Net income (loss) per common share
   Comprehensive income (loss)
  7




---



##### 



Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005Net income (loss) for period
    
    $
    304,979
    
    
    $
    (251,438
    )Other comprehensive income:Foreign currency translation adjustments
    
    
    (25,036
    )
    
    
    86,099Comprehensive loss for the period
    
    $
    279,943
    
    
    $
    (165,339
    )
 Stock-based compensation
    Reclassifications
  2. Discontinued Operations
   8




---



##### 



Three months endedApril 2, 2005Net revenues of discontinued operations
    
    $
    1,038,000Pre-tax net losses of discontinued operations
    
    $
    95,478Net loss from discontinued operations applicable to
common stockholders  basic and diluted
    
    $
    (0.00
    )
 3. Business Acquisitions
  4. Long-term Debt (also see Notes 5 and 6)
  April 1,
    
    
    December 31,2006
    
    
    2005(unaudited)Notes payable to a Siemens  see (a) below:Tranche A
    
    $
    1,509,851
    
    
    $
    2,239,851Tranche B (Note 3)
    
    
    
    
    
    
    Tranche C (includes $1,596,831 and
$1,298,865 of accrued interest)
    
    
    21,039,223
    
    
    
    20,875,256Total notes payable to Siemens
    
    
    22,549,074
    
    
    
    23,115,107Notes payable to others (Note 3)
    
    
    3,029,320
    
    
    
    2,047,10025,578,394
    
    
    
    25,162,207Less current maturities
    
    
    5,447,565
    
    
    
    5,192,108$
    20,130,829
    
    
    $
    19,970,099
  Payable ThroughPayable in Cash
    
    
    Preferred Pricing
    
    
    Total AmountFirst quarter of 2007
    
    $
    2,528,000
    
    
    $
    2,920,000
    
    
    $
    5,448,000First quarter of 2008
    
    
    2,178,000
    
    
    
    2,920,000
    
    
    
    5,098,000First quarter of 2009
    
    
    1,771,000
    
    
    
    2,920,000
    
    
    
    4,691,000First quarter of 2010
    
    
    1,692,000
    
    
    
    2,920,000
    
    
    
    4,612,000First quarter of 2011 and thereafter
    
    
    1,684,000
    
    
    
    4,045,000
    
    
    
    5,729,000Total
    
    
    9,853,000
    
    
    
    15,725,000
    
    
    
    25,578,000
   9




---



##### 



April 1, 2006
    
    
    April 2, 2005Preferred pricing reductions recorded as a
reduction of cost of products sold
    
    $
    779,000
    
    
    $
    832,000Portion applied against quarterly principal payments
    
    $
    (730,000
    )
    
    $
    (730,000
    )Portion applied against quarterly interest payments
    
    
    (49,000
    )
    
    
    (102,000
    )$
    (779,000
    )
    
    $
    (832,000
    )
    5. Convertible Subordinated Notes
  10




---



##### 



6. Subordinated Notes and Warrant Liability
  11




---



##### 



. Stock-based Benefit Plans
 The 1987 Stock Option Plan
  The 1995 Flexible Stock Plan
  Flexible Stock Plan
  12




---



##### 



Impact of the Adoption of SFAS 123(R)
  Valuation Assumptions
  Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005Risk free interest rate
    
    
    N/A
    
    
    
    4.16
    %Expected life, in years
    
    
    N/A
    
    
    
    5-10Expected volatility
    
    
    N/A
    
    
    
    92
    %
 13




---



##### 



Stock-based Payment Award Activity
  WeightedAverageWeighted
    
    RemainingAverage
    
    Contractual Term
    
    AggregateShares
    
    Exercise
    
    (in years)
    
    Intrinsic ValueOutstanding at beginning of year
    
    
    5,258,770
    
    
    $
    1.36Granted
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    Forfeited /expired/cancelled
    
    
    17,000
    
    
    $
    2.27Outstanding at April 1, 2006
    
    
    5,241,770
    
    
    $
    1.36
    
    
    
    7.07
    
    
    $
    1,472,523Vested and expected to vest at
April 1, 2006
    
    
    5,241,770
    
    
    $
    1.36
    
    
    
    7.07
    
    
    $
    1,472,523Exercisable at April 1, 2006
    
    
    2,558,731
    
    
    $
    1.50
    
    
    
    5.81
    
    
    $
    1,073,956
   Weighted AverageGrant-DateShares
    
    Fair ValueNon-vested at January 1, 2006
    
    
    2,992,826
    
    
    $
    0.98Granted
    
    
    Vested
    
    
    (297,287
    )
    
    $
    0.89Forfeited unvested
    
    
    (12,500
    )
    
    $
    0.57Non-vested at April 1, 2006
    
    
    2,683,039
    
    
    $
    1.04
 Pro forma Information for Periods Prior to the Adoption of SFAS 123(R
  14




---



##### 



Three MonthsEndedApril 2, 2005Loss applicable to common stockholdersAs reported
    
    $
    (445,068
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net of tax effects
    
    
    (356,000
    )Pro forma, net loss
    
    $
    (801,068
    )Loss per shareBasic-as reported
    
    $
    (0.01
    )Basic-pro forma
    
    $
    (0.03
    )Diluted-as reported
    
    $
    (0.01
    )Diluted-pro forma
    
    $
    (0.03
    )
 8. Segments
  15




---



##### 



Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalHearing aids and other products revenues3 months ended
April 1, 2006
    
    $
    20,277,000
    
    
    $
    12,000
    
    
    
    
    
    
    
    
    
    
    $
    20,289,0003 months ended
April 2, 2005
    
    $
    17,590,000
    
    
    $
    8,000
    
    
    
    
    
    
    
    
    
    
    $
    17,598,000Service revenues3 months ended
April 1, 2006
    
    $
    1,059,000
    
    
    
    
    
    
    $
    309,000
    
    
    
    
    
    
    $
    1,368,0003 months ended
April 2, 2005
    
    $
    1,068,000
    
    
    
    
    
    
    $
    365,000
    
    
    
    
    
    
    $
    1,433,000Income (loss) from operations3 months ended
April 1, 2006
    
    $
    4,870,000
    
    
    $
    (36,000
    )
    
    $
    127,000
    
    
    $
    (3,288,000
    )
    
    $
    1,673,0003 months ended
April 2, 2005
    
    $
    3,856,000
    
    
    $
    (7,000
    )
    
    $
    181,000
    
    
    $
    (3,015,000
    )
    
    $
    1,015,0003 months ended
April 1, 2006Depreciation and
amortization
    
    $
    442,000
    
    
    
    
    
    
    $
    1,000
    
    
    $
    49,000
    
    
    $
    492,000Total assets
    
    $
    53,085,000
    
    
    
    
    
    
    $
    1,105,000
    
    
    $
    14,472,000
    
    
    $
    68,662,000Capital expenditures
    
    $
    400,000
    
    
    
    
    
    
    
    
    
    
    $
    45,000
    
    
    $
    445,0003 months ended
April 2, 2005Depreciation and
amortization
    
    $
    431,000
    
    
    
    
    
    
    $
    1,000
    
    
    $
    51,000
    
    
    $
    483,000Total assets
    
    $
    47,681,000
    
    
    
    
    
    
    $
    1,510,000
    
    
    $
    11,047,000
    
    
    $
    60,238,000Capital expenditures
    
    $
    158,000
    
    
    
    
    
    
    
    
    
    
    $
    43,000
    
    
    $
    201,000
  Three months ended2006
    
    
    2005Hearing aid revenues
    
    
    97.2
    %
    
    
    96.9
    %Other products revenues
    
    
    2.8
    %
    
    
    3.1
    %
  Three months ended2006
    
    
    2005Hearing aid repairs
    
    
    54.7
    %
    
    
    49.7
    %Testing and other income
    
    
    45.3
    %
    
    
    50.3
    %
 16




---



##### 



Three months ended2006
    
    2005General and administrative expense
    
    $
    3,239,000
    
    
    $
    2,964,000Deprecation and amortization
    
    $
    49,000
    
    
    $
    51,000Corporate loss from operations
    
    $
    3,288,000
    
    
    $
    3,015,000
   United States
    
    
    Canada
    
    
    United States
    
    
    Canada2006
    
    
    2006
    
    
    2005
    
    
    2005$
    
    
    $
    
    
    $
    
    
    $Hearing aid and
other product
revenues
    
    
    18,143,000
    
    
    
    2,146,000
    
    
    
    15,775,000
    
    
    
    1,823,000Service revenues
    
    
    1,265,000
    
    
    
    103,000
    
    
    
    1,343,000
    
    
    
    90,000Long-lived assets
    
    
    44,258,000
    
    
    
    10,231,000
    
    
    
    39,122,000
    
    
    
    9,725,000Total assets
    
    
    55,966,000
    
    
    
    12,696,000
    
    
    
    48,188,000
    
    
    
    12,050,000
 9. Liquidity
   17




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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 revenues target of $90 million in 2006;
expectation that in the remainder of 2006 the cost of products sold as a percent of revenues will
be consistent with the first quarter 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; and expectation that it will begin recording a minority interest during
the second quarter of 2006 relating to its joint venture HEARx West. 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 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
     18




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##### 



RESULTS OF OPERATIONS
 For the three months ended April 1, 2006 compared to the three months ended April 2, 2005
     19




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
  20




---



##### 



21




---



##### 



.
  .
  22




---



##### 



Payments due by period (000s)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    Than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    yearsLong-term debt (1)
    
    $
    25,578
    
    
    $
    5,448
    
    
    $
    9,789
    
    
    $
    9,221
    
    
    $
    1,120Convertible subordinated notes (3)
    
    
    6,875
    
    
    
    2,500
    
    
    
    4,375
    
    
    
    
    
    
    
    Subordinated notes
    
    
    4,620
    
    
    
    1,760
    
    
    
    2,860
    
    
    
    
    
    
    
    Subtotal of obligations recorded on balance sheet
    
    
    37,073
    
    
    
    9,708
    
    
    
    17,024
    
    
    
    9,221
    
    
    
    1,120Interest to be paid on long-term debt (2)
    
    
    1,822
    
    
    
    657
    
    
    
    869
    
    
    
    296
    
    
    
    Interest to be paid on convertible subordinated
notes (3)
    
    
    781
    
    
    
    461
    
    
    
    320
    
    
    
    
    
    
    
    Interest to be paid on subordinated notes
    
    
    432
    
    
    
    268
    
    
    
    164
    
    
    
    
    
    
    
    Operating leases
    
    
    17,362
    
    
    
    3,709
    
    
    
    10,225
    
    
    
    2,597
    
    
    
    831Employment agreements
    
    
    3,619
    
    
    
    1,135
    
    
    
    1,719
    
    
    
    765
    
    
    
    Purchase obligations
    
    
    1,167
    
    
    
    717
    
    
    
    450
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    62,256
    
    
    $
    16,655
    
    
    $
    30,771
    
    
    $
    12,879
    
    
    $
    1,951
 
 (1)
    
    Approximately $15.7 million can be repaid through preferred pricing reductions from
Siemens, including $2.9 million in less than 1 year and $5.8 million in years 1-3, $5.8
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 $49,000 in the
first quarter of 2006. (See Note 4  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
  23




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##### 



Revenue recognition
   Allowance for doubtful accounts
   Sales returns
  24




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##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Variable Rate
    
    
    
    Fixed Rate
    
    
    
    TotalPrime+1%
    
    
    
    10% note
    
    
    8%
    
    
    7%due January
    
    
    
    Due January
    
    
    due November
    
    
    due August2011
    
    
    
    2011
    
    
    2008
    
    
    2008
    
    
    Other$
    
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    
    $(000s)
    
    
    
    (000s)
    
    
    (000s)
    
    
    (000s)
    
    
    (000s)
    
    
    
    (000s)2006
    
    
    
    (1,746
    )
    
    
    
    (1,510
    )
    
    
    (1,875
    )
    
    
    (1,320
    )
    
    
    (860
    )
    
    
    
    (7,311
    )2007
    
    
    
    (4,019
    )
    
    
    
    
    
    
    
    (2,500
    )
    
    
    (1,760
    )
    
    
    (1,045
    )
    
    
    
    (9,324
    )2008
    
    
    
    (4,120
    )
    
    
    
    
    
    
    
    (2,500
    )
    
    
    (1,540
    )
    
    
    (666
    )
    
    
    
    (8,826
    )2009
    
    
    
    (4,229
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (374
    )
    
    
    
    (4,603
    )2010
    
    
    
    (6,925
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    
    (7,009
    )Total
    
    
    
    (21,039
    )
    
    
    
    (1,510
    )
    
    
    (6,875
    )
    
    
    (4,620
    )
    
    
    (3,029
    )
    
    
    
    (37,073
    )Estimated fair value
    
    
    
    (20,875
    )
    
    
    
    (1,490
    )
    
    
    (6,648
    )
    
    
    (4,503
    )
    
    
    (2,738
    )
    
    
    
    (36,254
    )
 Item 4. Controls and Procedures
   25




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##### 



PART II
  2.1
    
    Plan of Arrangement, including exchangeable share provisions (incorporated herein
by reference to Exhibit 2.3 to the Companys Joint Proxy Statement/Prospectus on
Form S-4 (Reg. No. 333-73022)).3.1
    
    Restated Certificate of Incorporation of HEARx Ltd., including certain certificates
of designations, preferences and rights of certain preferred stock of the Company
(incorporated herein by reference to Exhibit 3 to the Companys Current Report on
Form 8-K, filed May 17, 1996 (File No. 001-11655)).3.2
    
    Amendment to the Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1A to the Companys Quarterly Report on Form 10-Q for the
period ended June 28, 1996 (File No. 001-11655)).3.3
    
    Amendment to Restated Certificate of Incorporation including one for ten reverse
stock split and reduction of authorized shares (incorporated herein to Exhibit 3.5
to the Companys Quarterly Report on Form 10-Q for the period ending July 2, 1999
(File No. 001-11655)).3.4
    
    Amendment to Restated Certificate of Incorporation including an increase in
authorized shares and change of name (incorporated herein by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K, filed July 17, 2002 (File No.
001-11655)).3.5
    
    Certificate of Designations, Preferences and Rights of the Companys 1999 Series H
Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4
to the Companys Current Report on Form 8-K, filed December 17, 1999 (File No.
001-11655)).3.6
    
    Certificate of Designations, Preferences and Rights of the Companys Special Voting
Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Companys
Current Report on Form 8-K, filed July 19, 2002 (File No. 001-11655)).3.7
    
    Amendment to Certificate of Designations, Preferences and Rights of the Companys
1999 Series H Junior Participating Preferred Stock (incorporated herein by
reference to Exhibit 4 to the Companys Current Report on Form 8-K, filed July 17,
2002 (File No. 001-11655)).3.8
    
    Certificate of Designations, Preferences and Rights of the Companys 1998-E
Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed August 28, 2003 (File No. 001-11655)).3.9
    
    Amendment of Restated Certificate of Incorporation (increasing authorized capital)
(incorporated herein by reference to Exhibit 3.9 to the Companys Quarterly Report
on Form 10-Q, filed August 8, 2004.)3.10
    
    Amended and Restated By-Laws of HearUSA, Inc. (effective May 9, 2005) (incorporated
herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K,
filed May 13, 2005).4.1
    
    Amended and Restated Rights Agreement, dated July 11, 2002 between HEARx and the
Rights Agent, which includes an amendment to the Certificate of Designations,
Preferences and Rights of the Companys 1999 Series H Junior Participating
Preferred Stock (incorporated herein by reference to Exhibit 4.9.1 to the Companys
Joint Proxy/Prospectus on Form S-4 (Reg. No. 333-73022)).4.2
    
    Form of Support Agreement among HEARx Ltd., HEARx Canada, Inc. and HEARx
Acquisition ULC (incorporated herein by reference to Exhibit 99.3 to the Companys
Joint Proxy Statement/Prospectus on Form S-4 (Reg No. 333-73022)).4.3
    
    Form of 2003 Convertible Subordinated Note due November 30, 2008 (incorporated
herein by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K,
filed December 31, 2003).9.1
    
    Form of Voting and Exchange Trust Agreement among HearUSA, Inc., HEARx Canada, Inc
and HEARx Acquisition ULC and ComputerShare Trust Company of Canada (incorporated
herein by reference to Exhibit 9.1 to the Companys Joint Proxy
Statement/Prospectus on Form S-4 (Reg. No. 333-73022)).10.1
    
    Amended and Restated Credit Agreement, dated as of February 10, 2006, between
 26




---



##### 



HearUSA, Inc and Siemens Hearing Instruments, Inc.10.2
    
    Amended and Restated Security Agreement, dated as of February 10, 2006, between
HearUSA, Inc and Siemens Hearing Instruments, Inc.10.3
    
    Amended and Restated Supply Agreement, dated as of February 10, 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
 
 *
    
    Confidential treatment has been requested for portions of this agreement. 27




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##### 



SIGNATURES
  HearUSA Inc.(Registrant)May 15, 2006/s/ Stephen J. HansbroughStephen J. HansbroughChief Executive OfficerHearUSA, Inc./s/ Gino ChouinardGino ChouinardChief Financial OfficerHearUSA, Inc.
 28