##### 



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 endedJuly 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
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)1250 Northpoint Parkway, West Palm Beach, Florida
    
    33407(Address of Principal Executive Offices)
    
    (Zip Code)
 (561) 478-8770
 
 
 þ þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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##### 



INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets
July 1, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations
Six months ended July 1, 2006 and July 2, 2005
    
    
    4Consolidated Statements of Operations
Three months ended July 1, 2006 and July 2, 2005
    
    
    5Consolidated Statements of Cash Flows
Six months ended July 1, 2006 and July 2, 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II.
    
    OTHER INFORMATIONItem 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Item 6.
    
    Exhibits
    
    
    29Signatures
    
    
    30
 2




---



##### 



Part I  Financial Information
 Item 1. Financial Statements
 HearUSA, Inc.
Consolidated Balance Sheets
 July 1,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETS (Note 4)Current assetsCash and cash equivalents
    
    $
    2,384,639
    
    
    $
    6,706,944Restricted cash and cash equivalents
    
    
    444,850
    
    
    
    431,000Accounts and notes receivable, less allowance for
doubtful accounts of $477,521 and $413,386
    
    
    6,518,009
    
    
    
    6,715,933Inventories
    
    
    2,816,857
    
    
    
    1,604,943Prepaid expenses and other
    
    
    1,559,595
    
    
    
    1,627,407Total current assets
    
    
    13,723,950
    
    
    
    17,086,227Property and equipment, net
    
    
    3,649,804
    
    
    
    3,437,436Goodwill (Note 3)
    
    
    44,839,229
    
    
    
    36,394,959Intangible
assets, net (Note 3)
    
    
    12,438,641
    
    
    
    11,477,290Deposits and other
    
    
    688,419
    
    
    
    585,633Total Assets
    
    $
    75,340,043
    
    
    $
    68,981,545LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    8,922,908
    
    
    $
    8,499,812Accrued expenses
    
    
    2,035,776
    
    
    
    2,344,419Accrued salaries and other compensation
    
    
    2,624,485
    
    
    
    2,589,877Current maturities of long-term debt
    
    
    6,647,083
    
    
    
    5,192,108Current maturities of convertible subordinated notes, net
of debt discount of $1,505,922 and $1,847,853
    
    
    994,078
    
    
    
    652,147Current maturities of subordinated notes, net of debt
discount of $660,286 and $868,345
    
    
    1,099,714
    
    
    
    891,655Dividends payable
    
    
    34,562
    
    
    
    34,562Total current liabilities
    
    
    22,358,606
    
    
    
    20,204,580Long-term debt (Notes 3 and 4)
    
    
    24,022,814
    
    
    
    19,970,099Convertible subordinated notes  net of debt
discount of $887,941 and $1,565,187 (Note 5)
    
    
    2,862,059
    
    
    
    3,434,813Subordinated notes net of debt discount of
$234,183 and $512,350 (Note 6)
    
    
    2,185,777
    
    
    
    2,787,650Warrant liability (Note 6)
    
    
    1,030,627
    
    
    
    1,347,217Total long-term liabilities
    
    
    30,101,277
    
    
    
    27,539,779Commitments and contingencies
    
    
    
    
    
    
    Minority interest in net income of consolidated subsidiary
    
    
    61,638
    
    
    
    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
32,016,200 and 31,893,200 shares issued
    
    
    3,201,620
    
    
    
    3,189,320Stock subscription
    
    
    (412,500
    )
    
    
    (412,500
    )Additional paid-in capital
    
    
    122,534,653
    
    
    
    121,934,658Accumulated deficit
    
    
    (102,798,564
    )
    
    
    (103,252,279
    )Accumulated other comprehensive income
    
    
    2,778,221
    
    
    
    2,262,895Treasury stock, at cost: 523,662 common shares
    
    
    (2,485,141
    )
    
    
    (2,485,141
    )Total stockholders equity
    
    
    22,818,522
    
    
    
    21,237,186Total Liabilities and Stockholders Equity
    
    $
    75,340,043
    
    
    $
    68,981,545
 See accompanying notes to the consolidated financial statements
 3




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Six Months Ended July 1, 2006 and July 2, 2005
 Six Months EndedJuly 1,
    
    
    July 2,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Net revenuesHearing aids and other products
    
    $
    41,035,933
    
    
    $
    35,371,022Services
    
    
    2,873,613
    
    
    
    2,718,853Total net revenues
    
    
    43,909,546
    
    
    
    38,089,875Operating costs and expensesHearing aids and other products (Note 4)
    
    
    12,189,354
    
    
    
    9,968,893Services
    
    
    787,177
    
    
    
    935,949Total cost of products sold and services
    
    
    12,976,531
    
    
    
    10,904,842Center operating expenses
    
    
    20,064,968
    
    
    
    18,032,934General and administrative expenses (including approximately $474,000
non-cash employee stock-based compensation expense in 2006   Notes
1 and 7)
    
    
    6,587,924
    
    
    
    5,966,285Depreciation and amortization
    
    
    979,642
    
    
    
    973,181Total operating costs and expenses
    
    
    40,609,065
    
    
    
    35,877,242Income from operations
    
    
    3,300,481
    
    
    
    2,212,633Non-operating income (expense):Gain from insurance proceeds
    
    
    57,157
    
    
    
    129,596Interest income
    
    
    91,171
    
    
    
    28,829Interest expense (including approximately $1,380,000 and $1,096,000
of non-cash debt discount amortization and approximately $317,000 in
non-cash reduction in interest expense for the decrease in the fair
value of the warrant liability  Notes 4, 5 and 6)
    
    
    (2,797,794
    )
    
    
    (2,360,179
    )Minority
interest in net income of consolidated subsidiary (Note 1)
    
    
    (61,638
    )
    
    
    Income from continuing operations before income taxes
    
    
    589,377
    
    
    
    10,879Income taxes
    
    
    (66,150
    )
    
    
    Net income from continuing operations
    
    
    523,227
    
    
    
    10,879Discontinued operations (Note 2):Gain on disposition of assets
    
    
    
    
    
    
    365,158Net loss from discontinued operations
    
    
    
    
    
    
    (299,767
    )Total net income from discontinued operations
    
    
    
    
    
    
    65,391Net income
    
    
    523,227
    
    
    
    76,270Dividends on preferred stock
    
    
    (69,512
    )
    
    
    (367,077
    )Net income (loss) applicable to common stockholders
    
    $
    453,715
    
    
    $
    (290,807
    )Net income (loss) from continuing operations, after dividends on
preferred stock, applicable to common stockholders per common share
 basic and diluted
    
    $
    0.01
    
    
    $
    (0.01
    )Net income (loss) applicable to common stockholders per common share
 basic and diluted
    
    $
    0.01
    
    
    $
    (0.01
    )Weighted average number of shares of common stock outstanding  basic
    
    
    32,187,924
    
    
    
    31,199,595Weighted average number of shares of common stock outstanding 
diluted
    
    
    38,611,700
    
    
    
    31,199,595
 See accompanying notes to the consolidated financial statements
 4




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended July 1, 2006 and July 2, 2005
 Three Months EndedJuly 1,
    
    
    July 2,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Net revenuesHearing aids and other products
    
    $
    20,838,461
    
    
    $
    17,778,788Services
    
    
    1,418,551
    
    
    
    1,279,672Total net revenues
    
    
    22,257,012
    
    
    
    19,058,460Operating costs and expensesHearing aids and other products (Note 4)
    
    
    6,076,099
    
    
    
    5,101,956Services
    
    
    414,580
    
    
    
    437,292Total cost of products sold and services
    
    
    6,490,679
    
    
    
    5,539,248Center operating expenses
    
    
    10,300,882
    
    
    
    8,829,042General and administrative expenses (including approximately $241,000
non-cash employee stock-based compensation expense in 2006   Notes
1 and 7)
    
    
    3,348,586
    
    
    
    3,002,401Depreciation and amortization
    
    
    487,511
    
    
    
    492,657Total operating costs and expenses
    
    
    20,627,658
    
    
    
    17,863,348Income from operations
    
    
    1,629,354
    
    
    
    1,195,112Non-operating income (expense):Gain from insurance proceeds
    
    
    
    
    
    
    129,596Interest income
    
    
    51,516
    
    
    
    17,145Interest expense (including approximately $655,000 and $528,000 of
non-cash debt discount amortization and approximately $145,000 in
non-cash reduction in interest expense for the decrease in the fair
value of the warrant liability Notes 4, 5 and 6)
    
    
    (1,370,812
    )
    
    
    (1,177,566
    )Minority interest in net income of consolidated subsidiary
    
    
    (61,638
    )
    
    
    Income from continuing operations before income taxes
    
    
    248,420
    
    
    
    164,287Income taxes
    
    
    (28,000
    )
    
    
    Net income from continuing operations
    
    
    220,420
    
    
    
    164,287Discontinued operations (Note 2):Gain on disposition of assets
    
    
    
    
    
    
    365,158Net loss from discontinued operations
    
    
    
    
    
    
    (201,922
    )Total net income from discontinued operations
    
    
    
    
    
    
    163,236Net income
    
    
    220,420
    
    
    
    327,523Dividends on preferred stock
    
    
    (34,562
    )
    
    
    (173,447
    )Net income applicable to common stockholders
    
    $
    185,858
    
    
    $
    154,076Net income (loss) from continuing operations after dividends on
preferred stock, applicable to common stockholders per common share
 basic
    
    $
    0.01
    
    
    $
    (0.00
    )Net income (loss) from continuing operations after dividends on
preferred stock, applicable to common stockholders per common share
  diluted
    
    $
    0.00
    
    
    $
    (0.00
    )Net income applicable to common stockholders per common share  basic
    
    $
    0.01
    
    
    $
    0.00Net income applicable to common stockholders per common share 
diluted
    
    $
    0.00
    
    
    $
    0.00Weighted average number of shares of common stock outstanding  basic
    
    
    32,215,946
    
    
    
    31,933,380Weighted average number of shares of common stock outstanding 
diluted
    
    
    38,341,583
    
    
    
    42,318,950
 See accompanying notes to the consolidated financial statements
 5




---



##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Six Months Ended July 1, 2006 and July 2, 2005
 July 1,
    
    
    July 2,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Cash flows from operating activitiesNet income
    
    $
    523,227
    
    
    $
    76,270Adjustments to reconcile net income to net cash provided by operating activities:Debt discount amortization
    
    
    1,380,270
    
    
    
    1,095,860Depreciation and amortization
    
    
    979,642
    
    
    
    973,181Interest on Siemens Tranche C
    
    
    619,930
    
    
    
    478,088Employee stock-based compensation
    
    
    473,501
    
    
    
    Provision for doubtful accounts
    
    
    174,000
    
    
    
    186,684Net income from discontinued operations
    
    
    
    
    
    
    (65,391
    )Minority interest in income of consolidated subsidiaries
    
    
    61,638
    
    
    
    Consulting expense
    
    
    13,793
    
    
    
    Loss on the disposition of property and equipment
    
    
    9,450
    
    
    
    Principal payments on long-term debt made through
preferred pricing reductions
    
    
    (1,473,065
    )
    
    
    (1,462,133
    )Decrease in fair value of warrant liability
    
    
    (316,590
    )
    
    
    Other
    
    
    (13,850
    )
    
    
    (46,942
    )(Increase) decrease in:Accounts and notes receivable
    
    
    134,434
    
    
    
    275,117Inventories
    
    
    (1,207,938
    )
    
    
    9,552Prepaid expenses and other
    
    
    (3,524
    )
    
    
    (570,739
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    272,962
    
    
    
    (200,755
    )Accrued salaries and other compensation
    
    
    24,141
    
    
    
    618,293Net cash provided by continuing operations
    
    
    1,652,021
    
    
    
    1,367,085Net cash used in discontinued operations
    
    
    
    
    
    
    (186,792
    )Net cash provided by operating activities
    
    
    1,652,021
    
    
    
    1,180,293Cash flows from investing activitiesPurchase of property and equipment
    
    
    (563,885
    )
    
    
    (393,240
    )Business acquisitions
    
    
    (4,910,506
    )
    
    
    (976,922
    )Proceeds from sales of discontinued operations
    
    
    
    
    
    
    785,715Net cash used in investing activities
    
    
    (5,474,391
    )
    
    
    (584,447
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    3,165,285
    
    
    
    -Principal payments on long-term debt
    
    
    (1,445,785
    )
    
    
    (739,221
    )Principal payments on convertible subordinated notes
    
    
    (1,250,000
    )
    
    
    Principal payments on subordinated notes
    
    
    (880,000
    )
    
    
    Proceeds from the exercise of warrants
    
    
    
    
    
    
    1,725,000Proceeds from the exercise of employee stock options
    
    
    
    
    
    
    2,846Dividends paid on preferred stock
    
    
    (69,512
    )
    
    
    (414,455
    )Net cash provided by (used in) financing activities
    
    
    (480,012
    )
    
    
    574,170Effects of exchange rate changes on cash
    
    
    (19,923
    )
    
    
    (30,063
    )Net increase (decrease) in cash and cash equivalents
    
    
    (4,322,305
    )
    
    
    1,139,953Cash and cash equivalents at beginning of period
    
    
    6,706,944
    
    
    
    2,615,379Cash and cash equivalents at end of period
    
    $
    2,384,639
    
    
    $
    3,755,332Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    773,418
    
    
    $
    581,996Cash paid for taxes
    
    $
    66,000
    
    
    $
    Supplemental schedule of non-cash
investing and financing activities:Principal payments of long-term debt
through preferred pricing reductions
    
    $
    1,473,065
    
    
    $
    1,462,133Issuance of notes payable in
exchange for business acquisitions
    
    $
    4,640,000
    
    
    $
    2,000,000
 See accompanying notes to consolidated financial statements
 6




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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
  7




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
   Comprehensive income (loss)
   Six Months Ended
    
    Three Months EndedJuly 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005Net income for the period
    
    $
    523,227
    
    
    $
    76,270
    
    
    $
    220,420
    
    
    $
    327,523Other comprehensive income:Foreign currency
translation adjustments
    
    
    515,326
    
    
    
    (93,637
    )
    
    
    540,362
    
    
    
    (296,971
    )Comprehensive income
(loss) for the period
    
    $
    1,038,553
    
    
    $
    (17,367
    )
    
    $
    760,782
    
    
    $
    30,552
 Stock-based compensation
    8




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
  Reclassifications
  2. Discontinued Operations
    Six months
    
    Three monthsended
    
    endedJuly 2, 2005
    
    July 2, 2005Net revenues of discontinued operations
    
    $
    1,887,000
    
    
    $
    849,000Pre-tax net loss of discontinued operations
    
    $
    299,767
    
    
    $
    201,922Net 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
  9




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
 4. Long-term Debt (also see Notes 5 and 6)
  July 1,
    
    
    December 31,2006


    2005(unaudited)Notes payable to a Siemens  see below:Tranche A
    
    $
    779,851
    
    
    $
    2,239,851Tranche B (Note 3)
    
    
    3,152,221
    
    
    
    Tranche C (includes $1,619,114 and
$1,298,865 of accrued
interest)
    
    
    20,659,649
    
    
    
    20,875,256Total notes payable to Siemens
    
    
    24,591,721
    
    
    
    23,115,107Notes payable to others (Note 3)
    
    
    6,078,176
    
    
    
    2,047,10030,669,897
    
    
    
    25,162,207Less current maturities
    
    
    6,647,083
    
    
    
    5,192,108$
    24,022,814
    
    
    $
    19,970,099
      10




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
   Six Months Ended
    
    Three Months EndedJuly 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005Portion applied
against quarterly
principal payments
    
    $
    1,473,000
    
    
    $
    1,462,000
    
    
    $
    743,000
    
    
    $
    732,000Portion applied
against quarterly
interest payments
    
    $
    110,000
    
    
    $
    206,000
    
    
    $
    63,000
    
    
    $
    104,000Preferred pricing
reductions recorded
as a reduction of
cost of products
sold
    
    $
    (1,583,000
    )
    
    $
    (1,668,000
    )
    
    $
    (806,000
    )
    
    $
    (836,000
    )
    5. Convertible Subordinated Notes
   11




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
   6. Subordinated Notes and Warrant Liability
     12




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
   . Stock-based Benefit Plans
 The 1987 Stock Option Plan
  The 1995 Flexible Stock Plan
  The 2002 Flexible Stock Plan
  Impact of the Adoption of SFAS 123(R)
  13




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
 Valuation Assumptions
  Six Months EndedJuly 1,
    
    July 2,2006
    
    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
    
    
    
    
    
    $
    Forfeited /expired/cancelled
    
    
    65,754
    
    
    $
    6.48Outstanding at July 1, 2006
    
    
    5,418,016
    
    
    $
    1.30
    
    
    
    7.01
    
    
    $
    1,418,452Vested and expected to vest at
July 1, 2006
    
    
    5,418,016
    
    
    $
    1.30
    
    
    
    7.01
    
    
    $
    1,418,452Exercisable at July 1, 2006
    
    
    2,677,389
    
    
    $
    1.35
    
    
    
    5.80
    
    
    $
    1,092,482
 14




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
   Weighted AverageGrant-DateShares
    
    Fair ValueNon-vested at January 1, 2006
    
    
    2,992,826
    
    
    $
    0.98Granted
    
    
    225,000
    
    
    $
    0.95Vested
    
    
    (464,699
    )
    
    $
    0.85Forfeited unvested
    
    
    (12,500
    )
    
    $
    0.57Non-vested at July 1, 2006
    
    
    2,740,627
    
    
    $
    1.04
 Pro forma Information for Periods Prior to the Adoption of SFAS 123(R
   Six Months Ended
    
    Three Months EndedJuly 2,
    
    July 2,2005
    
    2005Net income (loss) applicable
to common stockholders as
reported
    
    $
    (290,807
    )
    
    $
    154,076Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of tax effects
    
    
    (747,000
    )
    
    
    (390,000
    )Pro forma, net loss
    
    $
    (1,037,807
    )
    
    $
    (235,924
    )Income (loss) per share-basicBasic and diluted  as reported
    
    $
    (0.01
    )
    
    $
    0.00Basic and diluted  pro forma
    
    $
    (0.03
    )
    
    $
    (0.01
    )
 15




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
 8. Segments
   Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalFor the six months ended:Hearing aids and other products revenuesJuly 1, 2006
    
    $
    41,018,000
    
    
    $
    18,000
    
    
    
    
    
    
    
    
    
    
    $
    41,036,000July 2, 2005
    
    $
    35,309,000
    
    
    $
    62,000
    
    
    
    
    
    
    
    
    
    
    $
    35,371,000Service revenuesJuly 1, 2006
    
    $
    2,118,000
    
    
    
    
    
    
    $
    756,000
    
    
    
    
    
    
    $
    2,874,000July 2, 2005
    
    $
    2,054,000
    
    
    
    
    
    
    $
    665,000
    
    
    
    
    
    
    $
    2,719,000Income (loss) from operationsJuly 1, 2006
    
    $
    9,695,000
    
    
    $
    (99,000
    )
    
    $
    392,000
    
    
    $
    (6,688,000
    )
    
    $
    3,300,000July 2, 2005
    
    $
    7,994,000
    
    
    $
    (11,000
    )
    
    $
    300,000
    
    
    $
    (6,070,000
    )
    
    $
    2,213,000As of and for the six months ended:July 1, 2006Depreciation and
amortization
    
    $
    878,000
    
    
    
    
    
    
    $
    2,000
    
    
    $
    100,000
    
    
    $
    980,000Total assets
    
    $
    59,774,000
    
    
    
    
    
    
    $
    1,105,000
    
    
    $
    14,461,000
    
    
    $
    75,340,000Capital expenditures
    
    $
    476,000
    
    
    
    
    
    
    
    
    
    
    $
    88,000
    
    
    $
    564,000July 2, 2005Depreciation and
amortization
    
    $
    866,000
    
    
    
    
    
    
    $
    3,000
    
    
    $
    104,000
    
    
    $
    973,000Total assets
    
    $
    48,913,000
    
    
    
    
    
    
    $
    1,273,000
    
    
    $
    12,189,000
    
    
    $
    62,375,000Capital expenditures
    
    $
    318,000
    
    
    
    
    
    
    
    
    
    
    $
    75,000
    
    
    $
    393,000
  Six months ended2006
    
    2005Hearing aid revenues
    
    
    96.0
    %
    
    
    95.5
    %Other products revenues
    
    
    4.0
    %
    
    
    4.5
    %
 16




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
  Six months ended2006
    
    2005Hearing aid repairs
    
    
    51.8
    %
    
    
    51.0
    %Testing and other income
    
    
    48.2
    %
    
    
    49.0
    %
  Six months ended2006
    
    2005General and administrative expenses
    
    $
    (6,588,000
    )
    
    $
    (5,966,000
    )Deprecation and amortization
    
    $
    (100,000
    )
    
    $
    (104,000
    )Corporate loss from operations
    
    $
    (6,688,000
    )
    
    $
    (6,070,000
    )
   United States
    
    
    Canada
    
    
    United States
    
    
    Canada2006
    
    
    2006
    
    
    2005
    
    
    2005$
    
    
    $
    
    
    $
    
    
    $Hearing aid and
other product
revenues
    
    
    36,377,000
    
    
    
    4,659,000
    
    
    
    31,534,000
    
    
    
    3,837,000Service revenues
    
    
    2,665,000
    
    
    
    209,000
    
    
    
    2,512,000
    
    
    
    207,000Long-lived assets
    
    
    49,751,000
    
    
    
    11,865,000
    
    
    
    41,028,000
    
    
    
    9,561,000Total assets
    
    
    61,272,000
    
    
    
    14,068,000
    
    
    
    50,204,000
    
    
    
    12,171,000
 9. Recent Accounting Pronouncements
  10. Liquidity
  17




---



##### 



HearUSA, Inc
Notes to Consolidated Financial Statements
  18




---



##### 



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 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 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 six 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 second part of the year and that those funds will be drawn from the
Siemens line of credit; expectations that capital expenditures for the second half of 2006 will be
consistent with the first half of 2006. 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
    19




---



##### 



RESULTS OF OPERATIONS
 For the three months ended July 1, 2006 compared to the three months ended July 2, 2005
       20




---



##### 



For the six months ended July 1, 2006 compared to the six months ended July 2, 2005
    21




---



##### 



22




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
        23




---



##### 



.
  24




---



##### 



Payments due by period (000s)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    Than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    yearsLong-term debt (1)
    
    $
    30,670
    
    
    $
    6,647
    
    
    $
    12,809
    
    
    $
    10,475
    
    
    $
    739Convertible subordinated notes (3)
    
    
    6,250
    
    
    
    2,500
    
    
    
    3,750
    
    
    
    
    
    
    
    Subordinated notes
    
    
    4,180
    
    
    
    1,760
    
    
    
    2,420
    
    
    
    
    
    
    
    Subtotal of obligations recorded on balance sheet
    
    
    41,100
    
    
    
    10,907
    
    
    
    18,979
    
    
    
    10,475
    
    
    
    739Interest to be paid on long-term debt (2)
    
    
    1,793
    
    
    
    707
    
    
    
    885
    
    
    
    201
    
    
    
    Interest to be paid on convertible subordinated
notes (3)
    
    
    646
    
    
    
    410
    
    
    
    236
    
    
    
    
    
    
    
    Interest to be paid on subordinated notes
    
    
    353
    
    
    
    237
    
    
    
    116
    
    
    
    
    
    
    
    Operating leases
    
    
    19,517
    
    
    
    2,526
    
    
    
    11,872
    
    
    
    3,183
    
    
    
    1,936Employment agreements
    
    
    4,086
    
    
    
    1,429
    
    
    
    2,027
    
    
    
    630
    
    
    
    Purchase obligations
    
    
    1,173
    
    
    
    747
    
    
    
    426
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    68,668
    
    
    $
    16,963
    
    
    $
    34,541
    
    
    $
    14,489
    
    
    $
    2,675
 
 (1)
    
    Approximately $18.5 million can be repaid through preferred pricing reductions from
Siemens, including $3.6 million in less than 1 year and $7.1 million in years 1-3, $7.1
million in years 4-5 and $739,000 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 $110,000 in the
first six 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
  25




---



##### 



Revenue recognition
   Allowance for doubtful accounts
   Sales returns
  RECENT ACCOUNTING PRONOUNCEMENTS
  26




---



##### 



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
    
    
    
    (1,207
    )
    
    
    
    (1,104
    )
    
    
    (1,250
    )
    
    
    (880
    )
    
    
    (985
    )
    
    
    
    (5,426
    )2007
    
    
    
    (4,105
    )
    
    
    
    (647
    )
    
    
    (2,500
    )
    
    
    (1,760
    )
    
    
    (1,923
    )
    
    
    
    (10,935
    )2008
    
    
    
    (4,195
    )
    
    
    
    (647
    )
    
    
    (2,500
    )
    
    
    (1,540
    )
    
    
    (1,502
    )
    
    
    
    (10,384
    )2009
    
    
    
    (4,295
    )
    
    
    
    (647
    )
    
    
    
    
    
    
    
    
    
    
    (1,181
    )
    
    
    
    (6,123
    )2010
    
    
    
    (6,858
    )
    
    
    
    (887
    )
    
    
    
    
    
    
    
    
    
    
    (487
    )
    
    
    
    (8,232
    )Total
    
    
    
    (20,660
    )
    
    
    
    (3,932
    )
    
    
    (6,250
    )
    
    
    (4,180
    )
    
    
    (6,078
    )
    
    
    
    (41,100
    )Estimated fair value
    
    
    
    (20,316
    )
    
    
    
    (3,925
    )
    
    
    (6,208
    )
    
    
    (4,063
    )
    
    
    (5,992
    )
    
    
    
    (40,504
    )
 Item 4. Controls and Procedures
   27




---



##### 



Part II Other Information
 Item 4. Submission of Matters to a Vote of Security Holders
   Against/Nominee
    
    For
    
    WithheldPaul A. Brown, M. D.
    
    
    25,877,353
    
    
    
    6,282,543Stephen J. Hansbrough
    
    
    25,941,528
    
    
    
    6,218,368Thomas W. Archibald
    
    
    25,942,868
    
    
    
    6,217,028David J. McLachlan
    
    
    25,933,894
    
    
    
    6,226,002Joseph L. Gitterman III
    
    
    25,943,201
    
    
    
    6,216,695Michel Labadie
    
    
    25,943,373
    
    
    
    6,216,523Bruce N. Bagni
    
    
    25,939,283
    
    
    
    6,220,613
 28




---



##### 



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).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
 29




---



##### 



SIGNATURES
  HearUSA Inc.(Registrant)August 8, 2006/s/Stephen J. HansbroughStephen J. HansbroughPresident/Chief Executive OfficerHearUSA, Inc./s/Gino ChouinardGino ChouinardEVP/Chief Financial OfficerHearUSA, Inc.
 30