##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K/A
(Amendment No. 1)
 ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended                      DECEMBER 31, 2005
 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
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $0.10 per share
    
    American Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None
 Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ




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##### 



Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
 Indicate by check mark 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 if disclosure of delinquent filers pursuant to item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in PART III of this Form
10-K or any amendment to this Form 10-K . [ ]
 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
 As of July 2, 2005, the aggregate market value of the registrants Common Stock held by
non-affiliates (based upon the closing price of the Common Stock on the American Stock Exchange)
was approximately $44,699,073.
 On March 20, 2006, 31,379,538 shares of the registrants common stock and 780,358 of
exchangeable shares were outstanding.
 DOCUMENTS INCORPORATED BY REFERENCE
 Portions of registrants definitive proxy statement for the 2006 Annual Meeting of the
registrants stockholders (2006 Proxy Statement), to be filed with the Securities and Exchange
Commission, are incorporated by reference in Part III hereof.




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##### 



Explanatory Note
   
    
    Part II  Item 6  Selected Financial Data
    
    Part II  Item 7  Managements Discussion and Analysis
    
    Part II  Item 8  Financial Statements and Supplementary Data
    
    Part II  Item 9A. Controls and Procedures
    
    Part IV  Item 15  Exhibits and Financial Statement Schedules
 3




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##### 



PART II
 Item 6. Selected Financial Data
 
 4




---



##### 



Year EndedRestated seeNote 22December 31
    
    
    December 25
    
    
    December 27
    
    
    December 28
    
    
    December 292005-
    
    
    2004
    
    
    2003
    
    
    2002 (1)
    
    
    2001Net revenues
    
    $
    76,672,003
    
    
    $
    68,749,542
    
    
    $
    67,080,108
    
    
    $
    55,038,793
    
    
    $
    48,796,110Total operating costs and expenses
    
    
    72,957,087
    
    
    
    66,411,162
    
    
    
    64,812,179
    
    
    
    59,350,819
    
    
    
    56,995,460Income (loss) from operations
    
    
    3,714,916
    
    
    
    2,338,380
    
    
    
    2,267,929
    
    
    
    (4,312,026
    )
    
    
    (8,199,350
    )Non-operating income (expenses):Gain from insurance settlement (2)
    
    
    430,122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest income
    
    
    53,921
    
    
    
    17,543
    
    
    
    20,836
    
    
    
    114,152
    
    
    
    222,349Interest expense (including
approximately $2,540,000,
$2,127,000 and $517,000, in 2005,
2004 and 2003, of non-cash debt
discount amortization and
approximately $513,000 in non-cash
reduction in interest expense for
the decrease in the fair value of
the warrant liability in 2005)
    
    
    (4,640,558
    )
    
    
    (4,563,729
    )
    
    
    (2,828,327
    )
    
    
    (1,722,990
    )
    
    
    (652,530
    )Loss before equity in loss of
affiliated company and loss from
discontinued operations
    
    
    (441,599
    )
    
    
    (2,207,806
    )
    
    
    (539,562
    )
    
    
    (5,920,864
    )
    
    
    (8,629,531
    )Equity in loss of affiliated company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (630,801
    )
    
    
    Loss from continuing operationsbefore income taxes
    
    
    (441,599
    )
    
    
    (2,207,806
    )
    
    
    (539,562
    )
    
    
    (6,551,665
    )
    
    
    (8,629,531
    )Income taxes
    
    
    (78,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss from continuing operations
    
    
    (519,599
    )
    
    
    (2,207,806
    )
    
    
    (539,562
    )
    
    
    (6,551,665
    )
    
    
    (8,629,531
    )Loss from discontinued operations
    
    
    (63,553
    )
    
    
    (550,696
    )
    
    
    (569,827
    )
    
    
    (328,804
    )
    
    
    Dividends on preferred stock
    
    
    (700,675
    )
    
    
    (708,159
    )
    
    
    (626,956
    )
    
    
    (696,541
    )
    
    
    (812,205
    )Net loss applicable to common
stockholders
    
    $
    (1,283,827
    )
    
    $
    (3,466,661
    )
    
    $
    (1,736,345
    )
    
    $
    (7,577,010
    )
    
    $
    (9,441,736
    )Loss per
common shareBasic and diluted, loss from
continuing operations, including
dividends on preferred stock
    
    $
    (0.04
    )
    
    $
    (0.10
    )
    
    $
    (0.04
    )
    
    $
    (0.32
    )
    
    $
    (0.72
    )Basis and diluted, net loss
applicable to common stockholders
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    (0.06
    )
    
    $
    (0.34
    )
    
    $
    (0.72
    )Weighted average number of common
shares outstanding
    
    
    31,610,793
    
    
    
    30,426,829
    
    
    
    30,424,262
    
    
    
    22,534,393
    
    
    
    13,120,137Cash dividends per common share
    
    None
    
    None
    
    None
    
    None
    
    None
 
 (1)
    
    As discussed in Note 5  Business Acquisitions Notes to the Consolidated Financial
Statements included herein, effective June 30, 2002; the Company completed its business combination
with Helix.(2)
    
    The gain from insurance settlement is from insurance proceeds and final payment resulting from
2004 hurricane damages and business interruption claims sustained in Florida hearing care centers. 5




---



##### 



As ofDecember 31
    
    
    December 25
    
    
    December 27
    
    
    December 28
    
    
    December 292005
    
    
    2004
    
    
    2003
    
    
    2002 (1)
    
    
    2001Total assets
    
    $
    68,981,545
    
    
    $
    59,422,361
    
    
    $
    66,183,350
    
    
    $
    64,996,870
    
    
    $
    21,341,522Working capital deficit
    
    
    (3,118,353
    )
    
    
    (4,898,459
    )
    
    
    (2,330,035
    )
    
    
    (10,231,372
    )
    
    
    (738,562
    )Long-term debt:Long-term debt, net
of current
maturities
    
    
    19,970,099
    
    
    
    17,296,125
    
    
    
    20,579,977
    
    
    
    22,082,389
    (2)
    
    
    8,750,999Convertible
subordinated notes
and subordinated
notes, net of debt
discount of
$2,077,537, $5,443,879
and $7,423,596
    
    
    6,222,463
    
    
    
    2,056,121
    
    
    
    76,404
    
    
    
    
    
    
    
    Mandatorily redeemable
convertible preferred
stock
    
    
    
    
    
    
    4,709,921
    
    
    
    4,600,107
    
    
    
    
    
    
    
    
 
 (1)
    
    As discussed in Note 5  Business Acquisitions, Notes to the Consolidated Financial Statements
included herein, effective June 30, 2002, the Company completed its business combination with
Helix.(2)
    
    Includes $110,890 of long-term debt of discontinued operations. 6




---



##### 



Item 7.
    
    Managements Discussion and Analysis of Results of Operations
and Financial Condition
 GENERAL
     RESULTS OF OPERATIONS
 2005 compared to 2004
   7




---



##### 



8




---



##### 



2004 compared to 2003
      9




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
    ,
 10




---



##### 



.
 .
  .
  11




---



##### 



Payments due by period (000's)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1 - 3
    
    
    4 - 5
    
    
    Than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    years$
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $Long-term debt (1)
    
    
    25,162
    
    
    
    5,192
    
    
    
    9,353
    
    
    
    9,362
    
    
    
    1,255Convertible subordinated notes (3)
    
    
    7,500
    
    
    
    2,500
    
    
    
    5,000
    
    
    
    
    
    
    
    Subordinated notes
    
    
    5,060
    
    
    
    1,760
    
    
    
    3,300
    
    
    
    
    
    
    
    Subtotal of obligations recorded on balance sheet
    
    
    37,722
    
    
    
    9,452
    
    
    
    17,653
    
    
    
    9,362
    
    
    
    1,255Interest to be paid on long-term debt (2)
    
    
    3,419
    
    
    
    1,175
    
    
    
    1,546
    
    
    
    680
    
    
    
    18Interest to be paid on convertible subordinated notes (3)
    
    
    928
    
    
    
    512
    
    
    
    416
    
    
    
    
    
    
    
    Interest to be paid on subordinated notes
    
    
    519
    
    
    
    300
    
    
    
    219
    
    
    
    
    
    
    
    Operating leases
    
    
    18,935
    
    
    
    5,368
    
    
    
    10,759
    
    
    
    2,070
    
    
    
    738Employment agreements
    
    
    3,903
    
    
    
    1,135
    
    
    
    1,868
    
    
    
    900
    
    
    
    Purchase obligations
    
    
    1,356
    
    
    
    756
    
    
    
    600
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    66,782
    
    
    
    18,698
    
    
    
    33,061
    
    
    
    13,012
    
    
    
    2,011
 
 (1)
    
    Approximately $16.5 million can be repaid through preferred pricing reductions from
Siemens, including $3.0 million in less than 1 year and $5.8 in years 1-3, $5.8 in years 4-5
and $1.7 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 February 10, 2006
amended and restated credit agreement with them. Interest repaid through preferred pricing
reductions was $389,000 in 2005. (See Note 6a  Long-Term Debt, Note to the 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 RECENT DEVELOPMENTS
     12




---



##### 



CRITICAL ACCOUNTING POLICIES
  Goodwill
  Revenue recognition
   13




---



##### 



Allowance for doubtful accounts
   Sales returns
  RECENT ACCOUNTING PRONOUNCEMENT
 Share-Based Payment, Accounting for Stock Based Compensation Accounting for Stock
Issued to Employees.
 Accounting Changes and Error Corrections- A
Replacement of APB Opinion No. 20 and FASB Statement No. 3
 14




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##### 



Item 8. Financial Statements and Supplementary Data
 PageIndex to Financial StatementsFinancial Statements:Report of Independent Registered Public Accounting Firm
    
    
    16Consolidated Balance Sheets at December 31, 2005 and December 25, 2004
    
    
    17Consolidated Statements of Operations for the years ended December 31, 2005,
December 25, 2004, and December 27, 2003
    
    
    18Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2005, December 25, 2004 and December 27, 2003
    
    
    19Consolidated Statements of Cash Flows for the years ended December 31, 2005,
December 25, 2004, and December 27, 2003
    
    
    21Notes to Consolidated Financial Statements
    
    
    23Financial Statement Schedule:II Valuation
and Qualifying Accounts  For the years ended December 31,
2005December 25, 2004 and December 27, 2003
    
    
    47
 15




---



##### 



Report of Independent Registered Public Accounting Firm
 
       
 16




---



##### 



Restated seeNote 22December 31,
    
    
    December 25,ASSETS (Note 6)
    
    2005
    
    
    2004Current assetsCash and cash equivalents
    
    $
    6,706,944
    
    
    $
    2,615,379Restricted cash and cash equivalents (Note 2)
    
    
    431,000
    
    
    
    435,000Accounts and notes receivable, less allowance for
doubtful accounts of $413,386 and $373,583
    
    
    6,715,933
    
    
    
    5,997,245Inventories
    
    
    1,604,943
    
    
    
    801,234Prepaid expenses and other
    
    
    1,627,407
    
    
    
    557,435Current assets held for sale
    
    
    
    
    
    
    77,458Total current assets
    
    
    17,086,227
    
    
    
    10,483,751Property and equipment, net (Notes 3 and 6)
    
    
    3,474,381
    
    
    
    3,346,788Goodwill (Notes 4 and 5)
    
    
    36,394,959
    
    
    
    33,210,380Intangible assets, net (Notes 4 and 5)
    
    
    11,440,345
    
    
    
    11,094,169Deposits and other
    
    
    585,633
    
    
    
    551,148Long-term assets held for sale (Note 19)
    
    
    
    
    
    
    736,125$
    68,981,545
    
    
    $
    59,422,361LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    8,499,812
    
    
    $
    6,644,600Accrued expenses
    
    
    2,344,419
    
    
    
    2,424,147Accrued salaries and other compensation
    
    
    2,589,877
    
    
    
    1,982,559Current maturities of long-term debt (Note 6)
    
    
    5,192,108
    
    
    
    4,152,908Current maturities of convertible subordinated notes, net of debt
discount of $1,847,853 (Note 7)
    
    
    652,147
    
    
    
    Current maturities of subordinated notes, net of debt discount of
$868,345 (Note 8)
    
    
    891,655
    
    
    
    Dividends payable (Notes 9 and 10C)
    
    
    34,562
    
    
    
    177,996Total current liabilities
    
    
    20,204,580
    
    
    
    15,382,210Long-term debt (Note 6)
    
    
    19,970,099
    
    
    
    17,296,125Convertible
subordinated notes, net of debt discount of $1,565,187 and $5,443,879
(Note 7)
    
    
    3,434,813
    
    
    
    2,056,121Subordinated notes, net of debt discount of $512,350 (Note 8)
    
    
    2,787,650
    
    
    
    Warrant liability (Note 8)
    
    
    1,347,217
    
    
    
    Total long-term liabilities
    
    
    27,539,779
    
    
    
    19,352,246Commitments and contingencies (Notes 3,6,7,9,11 and 15)
    
    
    
    
    
    
    Mandatorily redeemable convertible preferred stock (Note 9)
    
    
    
    
    
    
    4,709,921Stockholders equityPreferred stock (aggregate liquidation preference $2,330,000 and
$2,330,000, $1 par, 7,500,000 shares authorized (Note 10)
Series H Junior Participating (none outstanding)
    
    
    
    
    
    
    Series J (233 shares outstanding) (Note 10C)
    
    
    233
    
    
    
    233Total preferred stock
    
    
    233
    
    
    
    233Common stock: $0.10 par; 75,000,000 shares authorized: 31,893,200
and 30,060,690 shares issued (Notes 4,5,7,9,10 and 11)
    
    
    3,189,320
    
    
    
    3,006,069Stock subscription (Note 10B)
    
    
    (412,500
    )
    
    
    (412,500
    )Additional paid-in capital
    
    
    121,934,658
    
    
    
    120,197,937Accumulated deficit
    
    
    (103,252,279
    )
    
    
    (101,968,452
    )Accumulated other comprehensive income
    
    
    2,262,895
    
    
    
    1,639,838Treasury stock, at cost: 523,662 common shares
    
    
    (2,485,141
    )
    
    
    (2,485,141
    )Total stockholders equity
    
    
    21,237,186
    
    
    
    19,977,984$
    68,981,545
    
    
    $
    59,422,361
 See accompanying notes to consolidated financial statements 17
      Year EndedRestated seeNote 22December 31,
    
    
    December 25,
    
    
    December 27,2005
    
    
    2004
    
    
    2003Net revenuesHearing aids and other products
    
    $
    71,445,381
    
    
    $
    63,227,775
    
    
    $
    60,927,044Services
    
    
    5,226,622
    
    
    
    5,521,767
    
    
    
    6,153,064Total net revenues
    
    
    76,672,003
    
    
    
    68,749,542
    
    
    
    67,080,108Operating costs and expensesHearing aids and other products
    
    
    20,972,635
    
    
    
    17,511,405
    
    
    
    18,836,929Services
    
    
    1,793,944
    
    
    
    1,718,287
    
    
    
    128,759Total cost of products sold and services
    
    
    22,766,579
    
    
    
    19,229,692
    
    
    
    18,965,688Center operating expenses
    
    
    36,555,590
    
    
    
    34,890,950
    
    
    
    32,591,897General and administrative expenses
    
    
    11,660,725
    
    
    
    10,218,283
    
    
    
    10,470,717Depreciation and amortization
    
    
    1,974,193
    
    
    
    2,072,237
    
    
    
    2,783,877Total operating costs and expenses
    
    
    72,957,087
    
    
    
    66,411,162
    
    
    
    64,812,179Income from operations
    
    
    3,714,916
    
    
    
    2,338,380
    
    
    
    2,267,929Non-operating income (expense):Gain from insurance settlement
    
    
    430,122
    
    
    
    
    
    
    
    Interest income
    
    
    53,921
    
    
    
    17,543
    
    
    
    20,836Interest expense (including approximately
$2,540,000, $2,127,000 and $517,000, in 2005,
2004 and 2003, of non-cash debt discount
amortization and a non-cash reduction of
approximately $513,000 in interest expense
for the decrease in the fair value of the
warrant liability)
    
    
    (4,640,558
    )
    
    
    (4,563,729
    )
    
    
    (2,828,327
    )Loss from continuing operations before income
taxes
    
    
    (441,599
    )
    
    
    (2,207,806
    )
    
    
    (539,562
    )Income taxes
    
    
    (78,000
    )
    
    
    
    
    
    
    Net loss from continuing operations
    
    
    (519,599
    )
    
    
    (2,207,806
    )
    
    
    (539,562
    )Discontinued operations (Note 19)
Gain on disposition of assets
    
    
    332,470
    
    
    
    
    
    
    
    Loss from discontinued operations
    
    
    (396,023
    )
    
    
    (550,696
    )
    
    
    (569,827
    )Net loss from discontinued operations
    
    
    (63,553
    )
    
    
    (550,696
    )
    
    
    (569,827
    )Net loss
    
    
    (583,152
    )
    
    
    (2,758,502
    )
    
    
    (1,109,389
    )Dividends on preferred stock (Notes 9 and 10C)
    
    
    (700,675
    )
    
    
    (708,159
    )
    
    
    (626,956
    )Net loss applicable to common stockholders
    
    $
    (1,283,827
    )
    
    $
    (3,466,661
    )
    
    $
    (1,736,345
    )Net loss from continuing operations,
including dividends on preferred stock,
applicable to common stockholders  basic and
diluted
    
    $
    (0.04
    )
    
    $
    (0.10
    )
    
    $
    (0.04
    )Net loss applicable to common stockholders
per common share  basic and diluted (Note 1)
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    (0.06
    )Weighted average number of shares of
common stock outstanding  (Notes 1, 10 and 11)
    
    
    31,610,793
    
    
    
    30,426,829
    
    
    
    30,424,262
 See accompanying notes to consolidated financial statements
 18
      Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2005
    
    

December 25, 2004
    
    

December 27, 2003Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountPreferred stockBalance, beginning of year
    
    
    233
    
    
    $
    233
    
    
    
    233
    
    
    $
    233
    
    
    
    4,796
    
    
    $
    4,796Exchange/redemption of preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,563
    )
    
    
    (4,563
    )Balance, end of year
    
    
    233
    
    
    $
    233
    
    
    
    233
    
    
    $
    233
    
    
    
    233
    
    
    $
    233Common stockBalance, beginning of year
    
    
    30,060,676
    
    
    $
    3,006,068
    
    
    
    29,528,450
    
    
    $
    2,952,845
    
    
    
    24,457,055
    
    
    $
    2,445,705Exercise of employee stock options
    
    
    130,000
    
    
    
    13,000
    
    
    
    6,250
    
    
    
    625
    
    
    
    20
    
    
    
    2Issuance of common stock for
exchangeable shares
    
    
    102,524
    
    
    
    10,252
    
    
    
    525,976
    
    
    
    52,598
    
    
    
    5,071,375
    
    
    
    507,138Warrant exercise
    
    
    1,600,000
    
    
    
    160,000
    
    
    
    
    
    
    
    Balance, end of year
    
    
    31,893,200
    
    
    $
    3,189,320
    
    
    
    30,060,676
    
    
    $
    3,006,068
    
    
    
    29,528,450
    
    
    $
    2,952,845Treasury stockBalance, beginning of year
    
    
    523,662
    
    
    $
    (2,485,141
    )
    
    
    523,662
    
    
    $
    (2,485,141
    )
    
    
    518,660
    
    
    $
    (2,483,441
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,002
    
    
    
    (1,700
    )Balance, end of year
    
    
    523,662
    
    
    $
    (2,485,141
    )
    
    
    523,662
    
    
    $
    (2,485,141
    )
    
    
    523,662
    
    
    $
    (2,485,141
    )Stock subscriptionBalance, beginning of year
    
    
    
    
    
    $
    (412,500
    )
    
    
    
    
    
    $
    (412,500
    )
    
    
    
    
    
    $
    (412,500
    )Balance, end of Year
    
    
    
    
    
    $
    (412,500
    )
    
    
    
    
    
    $
    (412,500
    )
    
    
    
    
    
    $
    (412,500
    )Additional paid-in capital:Balance, beginning of year
    
    
    
    
    
    $
    120,197,937
    
    
    
    
    
    
    $
    120,226,050
    
    
    
    
    
    
    $
    117,314,681Exchange/redemption of preferred
stock, including issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,759,324
    )Value of warrants and beneficial
conversion feature issued with
convertible subordinated notes
payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,708,229Value of warrants issued with debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429,339Exercise of employee stock options
    
    
    
    
    
    
    55,000
    
    
    
    
    
    
    
    3,563
    
    
    
    
    
    
    
    13Issuance of common stock for
exchangeable shares
    
    
    
    
    
    
    (10,252
    )
    
    
    
    
    
    
    (52,598
    )
    
    
    
    
    
    
    (507,138
    )Proceeds of Board of Directors stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,250Exercise of warrants
    
    
    
    
    
    
    1,665,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consulting expense
    
    
    
    
    
    
    26,973
    
    
    
    
    
    
    
    12,672Compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,250
    
    
    
    
    
    
    
    Balance, end of year
    
    
    
    
    
    $
    121,934,658
    
    
    
    
    
    
    $
    120,197,937
    
    
    
    
    
    
    $
    120,226,050
 See accompanying notes to consolidated financial statements
 19
      Year EndedRestated see Note 22December 31, 2005
    
    
    December 25, 2004
    
    
    December 27, 2003Amount
    
    
    Amount
    
    
    AmountAccumulated deficit:Balance, beginning of year
    
    $
    (101,968,452
    )
    
    $
    (98,501,791
    )
    
    $
    (96,765,446
    )Net loss
    
    
    (583,152
    )
    
    
    (2,758,502
    )
    
    
    (1,109,389
    )Dividends on preferred stock
    
    
    (700,675
    )
    
    
    (708,159
    )
    
    
    (626,956
    )Balance, end of year
    
    $
    (103,252,279
    )
    
    $
    (101,968,452
    )
    
    $
    (98,501,791
    )Accumulated other comprehensive income:Balance, beginning of year
    
    $
    1,639,838
    
    
    $
    1,033,616
    
    
    $
    462,825Foreign currency translation adjustment
    
    
    623,057
    
    
    
    606,222
    
    
    
    570,791Balance, end of year
    
    $
    2,262,895
    
    
    $
    1,639,838
    
    
    $
    1,033,616Comprehensive income (loss):Net loss
    
    $
    (583,152
    )
    
    $
    (2,758,502
    )
    
    $
    (1,109,389
    )Foreign currency translation adjustment
    
    
    623,057
    
    
    
    606,222
    
    
    
    570,791Comprehensive income (loss)
    
    $
    39,905
    
    
    $
    (2,152,280
    )
    
    $
    (538,598
    )
 See
accompanying notes to consolidated financial statements
 20
      Year EndedRestated seeNote 22December 31,
    
    
    December 25,
    
    
    December 27,2005
    
    
    2004
    
    
    2003Cash flows from operating activitiesNet loss
    
    $
    (583,152
    )
    
    $
    (2,758,502
    )
    
    $
    (1,109,389
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Debt discount amortization
    
    
    2,540,120
    
    
    
    2,127,054
    
    
    
    516,992Depreciation and amortization
    
    
    1,974,193
    
    
    
    2,072,237
    
    
    
    2,783,877Interest on Siemens Tranche D
    
    
    964,361
    
    
    
    655,568
    
    
    
    710,027Provision for doubtful accounts
    
    
    354,107
    
    
    
    430,454
    
    
    
    801,303Loss from discontinued operations
    
    
    63,553
    
    
    
    550,696
    
    
    
    569,827Consulting expense
    
    
    26,969
    
    
    
    12,672
    
    
    
    Principal payments on long-term debt made through preferred
pricing reductions
    
    
    (2,922,537
    )
    
    
    (2,920,804
    )
    
    
    (2,920,804
    )(Gain) loss on disposition of equipment
    
    
    (50,650
    )
    
    
    53,836
    
    
    
    648Decrease in fair value of warrant liability
    
    
    (513,293
    )
    
    
    
    
    
    
    Executive compensation expense
    
    
    
    
    
    
    8,250
    
    
    
    (Increase) decrease in:Accounts and notes receivable
    
    
    (982,851
    )
    
    
    (467,068
    )
    
    
    (842,031
    )Inventories
    
    
    (862,815
    )
    
    
    99,475
    
    
    
    (6,532
    )Prepaid expenses and other
    
    
    (606,766
    )
    
    
    636,835
    
    
    
    124,212Increase (decrease) in:Accounts payable and accrued expenses
    
    
    1,632,714
    
    
    
    (361,241
    )
    
    
    (4,671,611
    )Accrued salaries and other compensation
    
    
    595,860
    
    
    
    261,810
    
    
    
    (123,107
    )Net cash provided by (used in) continuing activities
    
    
    1,629,813
    
    
    
    401,272
    
    
    
    (4,166,588
    )Net cash provided by (used in) discontinued operations
    
    
    (113,457
    )
    
    
    (356,598
    )
    
    
    (666,013
    )Net cash provided by (used in) operating activities
    
    
    1,516,356
    
    
    
    44,674
    
    
    
    (4,832,601
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (1,184,400
    )
    
    
    (342,767
    )
    
    
    (221,854
    )Capital expenditures from discontinued operations
    
    
    (13,332
    )
    
    
    (39,906
    )
    
    
    (46,025
    )Proceeds from sale of discontinued operations
    
    
    1,101,385
    
    
    
    104,628
    
    
    
    1,880,244Business acquisitions
    
    
    (1,589,411
    )
    
    
    
    
    
    
    (251,533
    )Net cash provided by (used in) investing activities
    
    
    (1,685,758
    )
    
    
    (278,045
    )
    
    
    1,360,832Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    5,000,000
    
    
    
    
    
    
    
    3,500,000Proceeds from subordinated notes, net of issuing cost of $330,000
    
    
    5,170,000
    
    
    
    
    
    
    
    Proceeds from convertible notes, net of issuing costs of $266,000
    
    
    
    
    
    
    500,000
    
    
    
    8,734,000Payments on long-term debt from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (29,822
    )Principal payments on long-term debt
    
    
    (1,708,256
    )
    
    
    (3,310,477
    )
    
    
    (1,160,696
    )Principal payments on subordinated notes
    
    
    (440,000
    )
    
    
    
    
    
    
    Principal payments on convertible subordinated notes
    
    
    
    
    
    
    
    
    
    
    (2,000,000
    )Acquisition of treasury stock
    
    
    
    
    
    
    
    
    
    
    (1,700
    )Exchange and redemption of capital stock
    
    
    (4,928,041
    )
    
    
    
    
    
    
    (200,877
    )Proceeds from exercise of employee stock options
    
    
    68,000
    
    
    
    4,189
    
    
    
    15Proceeds from Board of Director sale of stock
    
    
    
    
    
    
    
    
    
    
    40,250Proceeds from the exercise of warrants
    
    
    1,825,000
    
    
    
    
    
    
    
    Dividends on preferred stock
    
    
    (770,196
    )
    
    
    (1,149,048
    )
    
    
    (1,076,317
    )Net cash provided by (used in) financing activities
    
    
    4,216,507
    
    
    
    (3,955,336
    )
    
    
    7,804,853
 See accompanying notes to consolidated financial statements
 21
      Year EndedRestated seeNote 22December 31,
    
    
    December 25,
    
    
    December 27,2005
    
    
    2004
    
    
    2003Effects of exchange rate changes on cash
    
    
    44,460
    
    
    
    89,205
    
    
    
    (28,226
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,091,565
    
    
    
    (4,099,502
    )
    
    
    4,304,858Cash and cash equivalents at beginning of year
    
    
    2,615,379
    
    
    
    6,714,881
    
    
    
    2,410,023Cash and cash equivalents at end of year
    
    $
    6,706,944
    
    
    $
    2,615,379
    
    
    $
    6,714,881Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    1,244,049
    
    
    $
    1,263,473
    
    
    $
    424,337Supplemental schedule of non-cash investing and financing
activities:Principal payments on long-term debt through preferred pricing
reductions
    
    $
    2,922,537
    
    
    $
    2,920,804
    
    
    $
    2,920,804Issuance of note payable and assumption of accounts payable
in exchange business acquisitions
    
    $
    2,250,000
    
    
    $
    
    
    
    $
    100,492Issuance of capital lease in exchange for property and equipment
    
    $
    141,913
    
    
    $
    
    
    
    $
    401,883Purchase of equipment with volume discount credit
    
    $
    
    
    
    $
    158,800
    
    
    $
    
 See accompanying notes to consolidated financial statements
 22
      1. Description of the Company and Summary of Significant Accounting Policies
 The Company
  Basis of Consolidation
   Revenue Recognition
   Foreign Currency Translation
  Comprehensive Income (Loss)
  23
      Fiscal year
  Concentration of credit risk
  Allowance for doubtful accounts
  Inventories
  Property and equipment
  Goodwill and other intangible assets
  Pre-opening costs
  Long-lived assets  impairments and disposals
  24
      Convertible Instruments, Warrants, Amortization of Debt Discount and Fair Value
Determination
  Subordinated Notes, Warrants, Amortization of Debt Discount and Fair Value Determination
  Advertising Costs
  Sales return policy
  Warranties
  Income taxes
  25
      Net loss per common share
   Stock-based compensation-Restated
  RestatedDecember 31,
    
    
    December 25,
    
    
    December 27,2005
    
    
    2004
    
    
    2003Loss applicable to common stockholdersAs reported
    
    $
    (1,283,827
    )
    
    $
    (3,466,661
    )
    
    $
    (1,736,345
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net of tax effects
    
    
    (1,529,000
    )
    
    
    (887,000
    )
    
    
    (447,000
    )Pro forma, net loss
    
    $
    (2,812,827
    )
    
    $
    (4,353,661
    )
    
    $
    (2,183,345
    )Loss per shareNet loss applicable to common stockholders per common
share  basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    (.06
    )Net loss applicable to common stockholders per common
share  basic and diluted pro forma
    
    $
    (0.09
    )
    
    $
    (0.14
    )
    
    $
    (.07
    )
 26
      2005
    
    
    2004
    
    
    2003Risk free interest rate
    
    
    4.39
    %
    
    
    4.16
    %
    
    
    2.90
    %Expected life, in years
    
    
    5-10
    
    
    
    5-10
    
    
    
    5-10Expected volatility
    
    
    96
    %
    
    
    92
    %
    
    
    98
    %
 Statements of Cash Flows
  Estimates
  Reclassifications
  2. Restricted Cash and Cash Equivalents
   3. Property and Equipment and Leases
  Range of
    
    
    December 31,
    
    
    December 25,Useful Lives
    
    
    2005
    
    
    2004Equipment, furniture and fixtures
    
    5 -10 years
    
    $
    10,868,588
    
    
    $
    10,305,606Leasehold Improvements
    
    5 -10 years
    
    
    7,665,710
    
    
    
    7,391,414Computer systems
    
    3 years
    
    
    4,806,302
    
    
    
    4,435,117Construction in progress
    
    
    N/A
    
    
    
    34,583
    
    
    
    23,49823,375,183
    
    
    
    22,155,635Less accumulated depreciation and amortization
    
    
    
    
    
    
    19,900,802
    
    
    
    18,808,847$
    3,474,381
    
    
    $
    3,346,788
 27
      Amount2006
    
    $
    1,095,0002007
    
    
    779,0002008
    
    
    583,0002009
    
    
    334,0002010
    
    
    227,000Thereafter
    
    
    134,000
   Amount2006
    
    $
    5,368,0002007
    
    
    4,592,0002008
    
    
    3,709,0002009
    
    
    2,458,0002010
    
    
    1,722,000Thereafter
    
    
    1,086,000
 4. Goodwill and Intangible Assets
  December 25,
    
    
    Additions &
    
    
    Currency
    
    
    December 31,2004
    
    
    Adjustments
    
    
    Translation
    
    
    2005Centers
    
    $
    32,330,000
    
    
    $
    2,806,000
    
    
    $
    379,000
    
    
    $
    35,515,000Network
    
    
    880,000
    
    
    
    
    
    
    
    
    
    
    
    880,000$
    33,210,000
    
    
    $
    2,806,000
    
    
    $
    379,000
    
    
    $
    36,395,000
 December 27,
    
    
    Additions &
    
    
    Currency
    
    
    December 25,2003
    
    
    Adjustments
    
    
    Translation
    
    
    2004Centers
    
    $
    31,901,000
    
    
    $
    
    
    
    $
    429,000
    
    
    $
    32,330,000Network
    
    
    880,000
    
    
    
    
    
    
    
    
    
    
    
    880,000$
    32,781,000
    
    
    $
    
    
    
    $
    429,000
    
    
    $
    33,210,000
 28
      December 31,
    
    
    December 25,2005
    
    
    2004Amortizable intangible assets:Patient files and customer lists
    
    $
    6,370,000
    
    
    $
    5,505,000Accumulated amortization
    
    
    (2,340,000
    )
    
    
    (1,766,000
    )Amortizable intangible assets, net
    
    
    4,030,000
    
    
    
    3,739,000Trademark and trade names
    
    
    7,410,000
    
    
    
    7,355,000$
    11,440,000
    
    
    $
    11,094,000
  2005
    
    
    2004
    
    
    2003Amortization expense
    
    $
    623,000
    
    
    $
    478,000
    
    
    $
    430,000
  Amount2006
    
    $
    718,0002007
    
    
    484,0002008
    
    
    466,0002009
    
    
    436,0002010
    
    
    409,000Thereafter
    
    
    1,495,000
 5. Business Acquisitions
   29
      6. Long-term Debt (Also see Notes 7 and 8)
  Before
    
    
    AfterDecember 31,
    
    
    December 31,
    
    
    December 25,2005
    
    
    2005
    
    
    2004Notes payable to a Siemens  see (a) below:Tranche A
    
    $
    1,299,984
    
    
    $
    2,239,851
    
    
    $
    3,599,988Tranche B
    
    
    39,867
    
    
    
    
    
    
    
    62,400Tranche C
    
    
    900,000
    
    
    
    20,875,256
    
    
    
    1,500,000Tranche D (including accrued interest of
$1,298,865 and $1,813,971)
    
    
    14,298,865
    
    
    
    
    
    
    
    13,590,284Tranche E
    
    
    1,576,391
    
    
    
    
    
    
    
    2,171,329Tranche F
    
    
    5,000,000
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    91,685Total notes payable to Siemens
    
    
    23,115,107
    
    
    
    23,115,107
    
    
    
    21,015,686Notes payable to others
    
    
    2,047,100
    
    
    
    2,047,100
    
    
    
    433,34725,162,207
    
    
    
    25,162,207
    
    
    
    21,449,033Less current maturities
    
    
    5,192,108
    
    
    
    5,392,253
    
    
    
    4,152,908$
    19,970,099
    
    
    $
    19,769,954
    
    
    $
    17,296,125
  Amount2006
    
    $
    5,192,0002007
    
    
    4,820,0002008
    
    
    4,533,0002009
    
    
    4,320,0002010
    
    
    5,042,000Thereafter
    
    
    1,255,000
 a)
    
    On December 7, 2001, the Company obtained a secured credit facility from Siemens comprised of
(a) a $10,875,000 secured five-year term loan credit facility (the Tranche A Loan); (b) a
$25,000,000 secured five-year revolving loan credit facility (the Tranche B Loan); (c) a
$3,000,000 secured five-year term loan facility (the Tranche C Loan) and (d) a $13,000,000
secured five-year term loan credit facility (the Tranche D Loan). On March 14, 2003, the
Company obtained an additional $3,500,000 secured five-year term loan from Siemens bearing
interest at a rate of 10% annually (the Tranche E Loan). The Tranche E Loan was obtained
pursuant to an amendment to the Companys credit agreement with Siemens and is otherwise
subject to the terms and conditions of the credit agreement and related security agreement.
On December 28, 2005, the Company obtained an additional $5,000,000, bearing interest at prime
plus 1% and having a five-year term (the Tranche F Loan). The Tranche F loan was obtained
pursuant to a term sheet signed on December 28, 2005, which indicates the intention of both
parties to extend their relationship and amend and restate the existing credit, supply and
security agreements for an additional five years. At December 31, 2005 $1,299,984, $39,867,
$900,000, $14,298,865, $1,576,391 and $5,000,000, representing principal on the Tranche A,
Tranche B, Tranche C, Tranche D, Tranche E and Tranche F Loans, respectively, were
outstanding.On February 10, 2006, HearUSA, Inc. (the Company) entered into an Amended and Restated
Credit Agreement (the Amended Credit Agreement), Amended and Restated Supply Agreement
(the Amended Supply Agreement) and an Amended and Restated Security Agreement with Siemens
Hearing Instruments, Inc. (Siemens). Pursuant to the amended agreements, the
 30
      2005
    
    
    2004
    
    
    2003Preferred pricing
reductions recorded as
a reduction of cost of
products sold
    
    $
    3,311,000
    
    
    $
    3,641,000
    
    
    $
    3,947,000Portion applied
against quarterly
principal payments
    
    $
    (2,922,000
    )
    
    $
    (2,921,000
    )
    
    $
    (2,921,000
    )Portion applied
against quarterly
interest payments
    
    
    (389,000
    )
    
    
    (720,000
    )
    
    
    (1,026,000
    )$
    (3,311,000
    )
    
    $
    (3,641,000
    )
    
    $
    (3,947,000
    )
  31
      under the Amended Supply Agreement, Siemens could declare a breach of the Amended
Credit Agreement and Siemens would have the right to declare all amounts outstanding under
the credit facility immediately due and payable.Pursuant to the agreements with Siemens, a change of control of the Company (as defined)
will constitute an event of default upon which Siemens may cancel its commitments under the
credit agreement and declare the entire outstanding amounts under the credit facilities to
be immediately due and payable.
 7. Convertible Subordinated Notes
     8. Subordinated Notes and Warrant Liability-Restated
  32
      9. Mandatorily Redeemable Convertible Preferred Stock
   33
      10. Stockholders Equity
 A. Private Placement
  B. Stock Subscription
  C. Series J Preferred Stock
      34
      D. Shareholder Rights Plan
    E. Series H Junior Participating Preferred Stock
  F. Exchangeable Rights Plan
  35
      G. Warrants
   Outstanding
    
    
    Expiration
    
    
    ExerciseWarrants
    
    
    Date
    
    
    Price2,759,893
    
    
    
    2008
    
    
    
    1.75240,000
    
    
    
    2010
    
    
    
    1.25560,000
    
    
    
    2010
    
    
    
    1.311,554,960
    
    
    
    2010
    
    
    
    2.005,114,853
 H. Aggregate and Per Share Cumulative Preferred Dividends
  I. Exchangeable Shares
  11. Stock Plans
  A. Employee Stock Option Plans
  36
      Year EndedDecember 31, 2005
    
    
    December 25, 2004
    
    
    December 27, 2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of
year
    
    
    5,296,987
    
    
    $
    1.49
    
    
    
    3,387,755
    
    
    $
    1.78
    
    
    
    2,168,290
    
    
    $
    3.04Granted
    
    
    360,000
    
    
    $
    1.63
    
    
    
    2,495,000
    
    
    $
    1.36
    
    
    
    1,785,000
    
    
    $
    0.46Exercised
    
    
    130,000
    
    
    $
    .52
    
    
    
    6,250
    
    
    $
    .67
    
    
    
    20
    
    
    $
    0.77Forfeited
    
    
    268,217
    
    
    $
    4.66
    
    
    
    592,018
    
    
    $
    2.69
    
    
    
    565,515
    
    
    $
    2.47Outstanding at end of year
    
    
    5,258,770
    
    
    $
    1.36
    
    
    
    5,296,987
    
    
    $
    1.49
    
    
    
    3,387,755
    
    
    $
    1.78Exercisable at end of year
    
    
    2,265,944
    
    
    
    
    
    
    
    1,538,540
    
    
    
    
    
    
    
    1,418,012Weighted average fair value of
options granted during year
    
    $
    1.35
    
    
    
    
    
    
    $
    1.20
    
    
    
    
    
    
    $
    0.37
 37
      WeightedAverage
    
    
    Weighted
    
    
    Options
    
    
    WeightedRemaining
    
    
    Average
    
    
    Exercisable
    
    
    AverageOptions
    
    
    Contractual
    
    
    Exercise
    
    
    At December 31,
    
    
    ExerciseRange of Exercise Price
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    2005
    
    
    Price$.35 - $.77
    
    
    1,762,900
    
    
    
    6.2
    
    
    $
    0.50
    
    
    
    996,023
    
    
    $
    .55$.78 - $2.00
    
    
    3,046,730
    
    
    
    8.5
    
    
    $
    1.36
    
    
    
    877,031
    
    
    $
    1.30$2.01 - $5.40
    
    
    294,511
    
    
    
    5.2
    
    
    $
    3.14
    
    
    
    238,261
    
    
    $
    3.34$5.41 - $8.75
    
    
    141,269
    
    
    
    1.3
    
    
    $
    7.20
    
    
    
    141,269
    
    
    $
    7.21$8.76 - $18.75
    
    
    13,360
    
    
    
    1.3
    
    
    $
    15.90
    
    
    
    13,360
    
    
    $
    15.915,258,770
    
    
    
    
    
    
    
    
    
    
    
    2,265,944
  2006
    
    
    3,366,7702007
    
    
    1,093,7502008
    
    
    708,2502009
    
    
    90,0005,258,770
 B. Non-Employee Director Plan
   C. Non-Employee Director Non-Plan Grant
  12. Major Customers and Suppliers
   38
      13. Related Party Transactions
   14. Income Taxes-Restated
  Restated2005
    
    
    2004
    
    
    2003Domestic
    
    $
    (1,425,000
    )
    
    $
    (3,142,000
    )
    
    $
    (727,000
    )Foreign
    
    
    905,000
    
    
    
    934,000
    
    
    
    187,000Total loss before loss of discontinued operations
    
    $
    (520,000
    )
    
    $
    (2,208,000
    )
    
    $
    (540,000
    )
  39
      Restated2005
    
    
    2004Depreciation
    
    $
    1,367,000
    
    
    $
    1,285,000Allowance for doubtful accounts
    
    
    142,000
    
    
    
    129,000Joint Venture
    
    
    (881,000
    )
    
    
    (985,000
    )Beneficial conversion feature
    
    
    (775,000
    )
    
    
    (1,236,000
    )Decrease in fair value of warrant liability
    
    
    (193,000
    )
    
    
    Amortization
    
    
    (1,321,000
    )
    
    
    (184,000
    )Other
    
    
    364,000
    
    
    
    279,000Net operating loss carryforwards
    
    
    28,452,000
    
    
    
    28,441,00027,155,000
    
    
    
    27,729,000Less valuation allowance
    
    
    (27,155,000
    )
    
    
    (27,729,000
    )Net deferred tax asset
    
    $
    
    
    
    $
    
    Restated2005
    
    
    2004
    
    
    2003Provision at Federal statutory rate
    
    $
    (177,000
    )
    
    $
    (751,000
    )
    
    $
    (183,000
    )State income taxes, net of Federal
income tax effect
    
    
    (16,000
    )
    
    
    (80,000
    )
    
    
    (20,000
    )Nondeductible expenses
    
    
    32,000
    
    
    
    29,000
    
    
    
    23,000Changes in valuation allowance
    
    
    574,000
    
    
    
    802,000
    
    
    
    256,000Other
    
    
    (335,000
    )
    
    
    
    
    
    
    (76,000
    )Income tax provision
    
    $
    78,000
    
    
    $
    
    
    
    $
    
  15. Commitments and Contingencies
  40
      16. Quarterly Financial Data (Unaudited)
 Restated
    
    
    RestatedYear Ended
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthDecember 31, 2005
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterNet revenues
    
    $
    19,030,585
    
    
    $
    19,058,460
    
    
    $
    19,615,555
    
    
    $
    18,967,403Operating costs and expenses
    
    
    18,015,611
    
    
    
    17,863,348
    
    
    
    18,353,874
    
    
    
    18,724,254Income (loss) from operations
    
    
    1,014,974
    
    
    
    1,195,112
    
    
    
    1,261,681
    
    
    
    243,149Net income (loss) applicable to
common stockholders
    
    $
    (445,068
    )
    
    $
    154,076
    
    
    $
    (164,453
    )
    
    $
    (828,382
    )Net loss from continuing
operations, including
dividends on preferred stock,
applicable to common
stockholders- basic and
diluted
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    (0.03
    )Net loss applicable to common
stockholders per common share
- basic and diluted (Note 1)
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    (0.03
    )
 Year Ended
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthDecember 25, 2004
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterNet revenues
    
    $
    16,048,307
    
    
    $
    17,190,923
    
    
    $
    17,535,395
    
    
    $
    17,974,917Operating costs and expenses
    
    
    16,228,093
    
    
    
    16,713,585
    
    
    
    16,316,981
    
    
    
    17,152,503Income (loss) from operations
    
    
    (179,786
    )
    
    
    477,338
    
    
    
    1,218,414
    
    
    
    822,414Net income (loss) applicable to
common stockholders
    
    $
    (1,615,869
    )
    
    $
    (948,008
    )
    
    $
    (233,413
    )
    
    $
    (669,371
    )Net loss from continuing
operations, including
dividends on preferred stock,
applicable to common
stockholders- basic and
diluted
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )Net loss applicable to common
stockholders per common share
- basic and diluted (Note 1)
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
   41
      17. Fair Value of Financial Instruments
   December 31, 2005
    
    
    December 25, 2004Book Value
    
    
    Fair Value
    
    
    Book Value
    
    
    Fair ValueLong-term debt
    
    $
    25,162,000
    
    
    $
    24,974,000
    
    
    $
    21,449,000
    
    
    $
    21,449,000Convertible
subordinated notes
    
    $
    7,500,000
    
    
    $
    7,273,000
    
    
    $
    7,500,000
    
    
    $
    7,500,000Subordinated notes
    
    $
    5,060,000
    
    
    $
    4,943,000
    
    
    $
    
    
    
    $
    Mandatorily
subordinated
redeemable
convertible
preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    4,710,000
    
    
    $
    4,710,000
 18. Recent Accounting Pronouncements
 Share-Based Payment, Accounting for Stock Based Compensation Accounting for Stock
Issued to Employees.
 Accounting Changes and Error Corrections- A
Replacement of APB Opinion No. 20 and FASB Statement No. 3
 42
      19. Discontinued Operations
      43
      2005
    
    
    2004
    
    
    2003Net revenues of discontinued operations:Quebec discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    2,600,000Minnesota, Washington and Wisconsin
discontinued operations
    
    
    1,825,000
    
    
    
    3,551,000
    
    
    
    3,465,000Combined net revenues
    
    $
    1,825,000
    
    
    $
    3,551,000
    
    
    $
    6,065,000Pre-tax net losses of discontinued
operations:Quebec discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    202,000Minnesota, Washington and Wisconsin
discontinued operations
    
    
    396,000
    
    
    
    551,000
    
    
    
    368,000Combined pre-tax net losses
    
    $
    396,000
    
    
    $
    551,000
    
    
    $
    570,000Net loss from discontinued operations
applicable to common stockholders-basis and
diluted:Quebec discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )Minnesota, Washington and Wisconsin
discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )
    
    
    (0.01
    )Combined net loss from discontinued
operations applicable to common
stockholders-basic and diluted
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.02
    )
 44
      20. Segments
  Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalHearing aids and other products revenues2005
    
    $
    71,365,000
    
    
    $
    80,000
    
    
    
    
    
    
    
    
    
    
    $
    71,445,0002004
    
    $
    63,149,000
    
    
    $
    79,000
    
    
    
    
    
    
    
    
    
    
    $
    63,228,0002003
    
    $
    60,858,000
    
    
    $
    69,000
    
    
    
    
    
    
    
    
    
    
    $
    60,927,000Service revenues2005
    
    $
    3,805,000
    
    
    
    
    
    
    $
    1,422,000
    
    
    
    
    
    
    $
    5,227,0002004
    
    $
    4,413,000
    
    
    
    
    
    
    $
    1,109,000
    
    
    
    
    
    
    $
    5,522,0002003
    
    $
    5,100,000
    
    
    
    
    
    
    $
    1,053,000
    
    
    
    
    
    
    $
    6,153,000Income (loss) from operations2005
    
    
    15,137,000
    
    
    
    (105,000
    )
    
    
    549,000
    
    
    
    (11,866,000
    )
    
    
    3,715,0002004
    
    
    12,310,000
    
    
    
    (27,000
    )
    
    
    447,000
    
    
    
    (10,392,000
    )
    
    
    2,338,0002003
    
    
    13,063,000
    
    
    
    (49,000
    )
    
    
    504,000
    
    
    
    (11,250,000
    )
    
    
    2,268,0002005Depreciation and
amortization
    
    
    1,764,000
    
    
    
    
    
    
    
    5,000
    
    
    
    205,000
    
    
    
    1,974,000Total assets
    
    
    50,119,000
    
    
    
    
    
    
    
    1,131,000
    
    
    
    17,732,000
    
    
    
    68,982,000Capital expenditures
    
    
    970,000
    
    
    
    
    
    
    
    
    
    
    
    228,000
    
    
    
    1,198,0002004Depreciation and
amortization
    
    
    1,893,000
    
    
    
    
    
    
    
    5,000
    
    
    
    174,000
    
    
    
    2,072,000Total assets
    
    
    47,241,000
    
    
    
    
    
    
    
    1,722,000
    
    
    
    10,459,000
    
    
    
    59,422,000Capital expenditures
    
    
    318,000
    
    
    
    
    
    
    
    3,000
    
    
    
    62,000
    
    
    
    383,0002003Depreciation and
amortization
    
    
    2,002,000
    
    
    
    
    
    
    
    3,000
    
    
    
    779,000
    
    
    
    2,784,000Total assets
    
    
    44,100,000
    
    
    
    
    
    
    
    1,149,000
    
    
    
    20,934,000
    
    
    
    66,183,000Capital expenditures
    
    
    174,000
    
    
    
    
    
    
    
    
    
    
    
    94,000
    
    
    
    268,000
 45
      2005
    
    
    2004
    
    
    2003Hearing aid revenues
    
    
    95.5
    %
    
    
    94.6
    %
    
    
    96.8
    %Other products revenues
    
    
    4.5
    %
    
    
    5.4
    %
    
    
    3.2
    %
  2005
    
    
    2004
    
    
    2003Hearing aid repairs
    
    
    53.4
    %
    
    
    50.1
    %
    
    
    60.5
    %Testing and other income
    
    
    46.6
    %
    
    
    49.9
    %
    
    
    39.5
    %
  2005
    
    
    2004
    
    
    2003General and administrative
expense
    
    $
    11,661,000
    
    
    $
    10,218,000
    
    
    $
    10,471,000Deprecation and amortization
    
    $
    205,000
    
    
    $
    174,000
    
    
    $
    779,000Corporate loss from
operations
    
    $
    11,866,000
    
    
    $
    10,392,000
    
    
    $
    11,250,000
   United States
    
    
    Canada
    
    
    United States
    
    
    Canada2005
    
    
    2005
    
    
    2004
    
    
    2004$
    
    
    $
    
    
    $
    
    
    $Hearing aid and
other product
revenues
    
    
    63,500,000
    
    
    
    7,945,000
    
    
    
    56,743,000
    
    
    
    6,485,000Service revenues
    
    
    4,835,000
    
    
    
    392,000
    
    
    
    5,212,000
    
    
    
    310,000Long-lived assets
    
    
    41,587,000
    
    
    
    10,308,000
    
    
    
    39,235,000
    
    
    
    9,704,000Total assets
    
    
    55,771,000
    
    
    
    13,211,000
    
    
    
    47,658,000
    
    
    
    11,764,000
  21. Liquidity
  46
      22. Restatement
  47
      HearUSA Inc.
Schedule II  Valuation and Qualifying Accounts
 Restated
    
    
    RestatedBalance at
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    
    
    
    
    
    
    
    
    EndOf Period
    
    
    Additions
    
    
    Deductions
    
    
    Of PeriodDecember 31, 2005Allowance for doubtful accounts
    
    $
    373,583
    
    
    $
    354,107
    
    
    $
    (314,304
    )
    
    $
    413,386Allowance for sales returns (1)
    
    $
    425,116
    
    
    $
    17,287
    
    
    $
    (1,818
    )
    
    $
    440,585Valuation allowance
    
    $
    27,729,000
    
    
    $
    
    
    
    $
    (574,000
    )
    
    $
    27,155,000December 25, 2004Allowance for doubtful accounts
    
    $
    490,881
    
    
    $
    430,454
    
    
    $
    (547,752
    )
    
    $
    373,583Allowance for sales returns
    
    $
    445,147
    
    
    $
    71,061
    
    
    $
    (91,092
    )
    
    $
    425,116Valuation allowance
    
    $
    28,531,000
    
    
    $
    
    
    
    $
    (802,000
    )
    
    $
    27,729,000December 27, 2003Allowance for doubtful accounts
    
    $
    578,323
    
    
    $
    801,303
    
    
    $
    (888,745
    )
    
    $
    490,881Allowance for sales returns
    
    $
    789,539
    
    
    $
    32,830
    
    
    $
    (377,222
    )
    
    $
    445,147Valuation allowance
    
    $
    28,787,000
    
    
    $
    
    
    
    $
    (256,000
    )
    
    $
    28,531,000
 
 (1)
    
    Allowance for sales returns is included in accounts payable on the Consolidated Balance
Sheets. 48
      Item 9A. Controls and Procedures
   49
      PART IV
 Item 15
 (a)
    
    The following documents are filed as part of this report:
 (1)
    
    Financial Statements
 (i)
    
    Consolidated Balance Sheets as of December 31, 2005 and December 25,
2004. Consolidated Statements of Operations for the years ended December 31, 2005,
December 25, 2004 and December 27, 2003.(ii)
    
    Consolidated Statements of Changes in Stockholders Equity for the
years ended December 31, 2005, December 25, 2004 and December 27, 2003.(iii)
    
    Consolidated Statements of Cash Flows for the years ended December
31, 2005, December 25, 2004 and December 27, 2003.(iv)
    
    Notes to Consolidated Financial Statements
 (2)
    
    Financial statement schedule:
 Schedule II Valuation and Qualifying Accounts
 (3)
    
    Exhibits:
 2.1
    
    Plan of Arrangement, including exchangeable share provisions (incorporated herein
by reference to Exhibit 2.3 to the Companys Joint Proxy Statement/Prospectus on
Form S-4 (Reg. No. 333-73022)).3.1
    
    Restated Certificate of Incorporation of HEARx Ltd., including certain certificates
of designations, preferences and rights of certain preferred stock of the Company
(incorporated herein by reference to Exhibit 3 to the Companys Current Report on
Form 8-K, filed May 17, 1996 (File No. 001-11655)).3.2
    
    Amendment to the Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1A to the Companys Quarterly Report on Form 10-Q for the
period ended June 28, 1996 (File No. 001-11655)).3.3
    
    Amendment to Restated Certificate of Incorporation including one for ten reverse
stock split and reduction of authorized shares (incorporated herein to Exhibit 3.5
to the Companys Quarterly Report on Form 10-Q for the period ending July 2, 1999
(File No. 001-11655)).3.4
    
    Amendment to Restated Certificate of Incorporation including an increase in
authorized shares and change of name (incorporated herein by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K, filed July 17, 2002 (File No.
001-11655)).3.5
    
    Certificate of Designations, Preferences and Rights of the Companys 1999 Series H
Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4
to the Companys Current Report on Form 8-K, filed December 17, 1999 (File No.
001-11655)).3.6
    
    Certificate of Designations, Preferences and Rights of the Companys Special Voting
Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Companys
Current Report on Form 8-K, filed July 19, 2002 (File No. 001-11655)).3.7
    
    Amendment to Certificate of Designations, Preferences and Rights of the Companys
1999 Series H Junior Participating Preferred Stock (incorporated herein by
reference to Exhibit 4 to the Companys Current Report on Form 8-K, filed July 17,
2002 (File No. 001-11655)).3.8
    
    Certificate of Designations, Preferences and Rights of the Companys 1998-E
Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed August 28, 2003 (File No. 001-11655)).3.9
    
    Amendment of Restated Certificate of Incorporation (increasing authorized capital)
(incorporated herein by reference to Exhibit 3.9 to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 26, 2004).3.10
    
    Amended and Restated By-Laws of HearUSA, Inc. (effective May 9, 2005) (incorporated
herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K,
filed May 13, 2005).
 50
      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
    
    HEARx Ltd. 1987 Stock Option Plan (incorporated herein by reference to Exhibit
10.11 to the Companys Registration Statement of Form S-18 (Reg. No. 33-17041-NY))#10.2
    
    HEARx Ltd. Stock Option Plan for Non-Employee Directors and Form of Option
Agreement (incorporated herein by reference to Exhibits 10.35 and 10.48 to
Post-Effective Amendment No. 1 to the Companys Registration Statement of Form S-18
(Reg. No. 33-17041-NY))#10.3
    
    1995 Flexible Employee Stock Plan (incorporated herein by reference to Exhibit 4 to
the Companys 1995 Proxy Statement)#10.4
    
    Employment Agreement, dated August 31, 2005 with Dr. Paul A. Brown (incorporated
herein by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q,
for the quarter ended October 1, 2005.)#10.5
    
    Employment Agreement, dated August 31, 2005 with Stephen J. Hansbrough
(incorporated herein by reference to Exhibit 10.2 to the Companys Quarterly Report
on Form 10-Q, for the quarter ended October 1, 2005.)#10.6
    
    Employment Agreement, dated August 31, 2005 with Gino Chouinard (incorporated
herein by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q,
for the quarter ended October 1, 2005.)#10.7
    
    Employment Agreement, dated August 31, 2005 with Ken Schofield (incorporated herein
by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q, for
the quarter ended October 1, 2005.)#10.8
    
    Form of Change in Control Agreement (incorporated herein by reference to Exhibit
10.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended October
1, 2005.)#10.9
    
    Credit Agreement, dated December 7, 2001 between HEARx Ltd and Siemens Hearing
Instruments, Inc (incorporated herein by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, filed December 26, 2001)10.10
    
    Security Agreement, dated December 7, 2001 between HEARx Ltd and Siemens Hearing
Instruments, Inc (incorporated herein by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K, December 26, 2001)10.11
    
    Supply Agreement, dated December 7, 2001 between HEARx Ltd and Siemens Hearing
Instruments, Inc (incorporated herein by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K, December 26, 2001)10.12
    
    HearUSA 2002 Flexible Stock Plan (incorporated herein by reference to Exhibit 10.9
to the Companys Joint Proxy Statement/Prospectus on Form S-4 (Reg. No. 333-73022)#10.13
    
    Amendment to Security Agreement, dated March 12, 2003 between HearUSA, Inc. and
Siemens Hearing Instruments, Inc. (incorporated herein by reference to Exhibit 10.2
to the Companys Form 10Q for the period ended March 29, 2003).10.14
    
    Amendment to Credit Agreement, dated March 12, 2003 between HearUSA, Inc. and
Siemens Hearing Instruments, Inc. (incorporated herein by reference to Exhibit 10.1
to the Companys Form 10-Q for the period ended March 29, 2003).
 51
      10.15
    
    Purchase Agreement dated August 19, 2005 by and among HearUSA, Inc. and the
purchasers named therein (incorporated by reference to Exhibit 10.1 to the
Companys Registration Statement on Form S-3/A filed October 7, 2005).10.16
    
    Form of Registration Rights Agreement by and among HearUSA, Inc. and the purchasers
named in the Purchase Agreement dated August 19, 2005 (incorporated by reference to
Exhibit 10.2 to the Companys Registration Statement on Form S-3/A filed October 7,
2005).10.17
    
    Asset Purchase Agreement dated June 15, 2005, between HearUSA, Inc. and Sonus-USA,
Inc. (incorporated herein by reference to Exhibit 10.5 to the Companys Quarterly
Report on Form 10-Q for the quarter ended July 2, 2005).21
    
    List of Subsidiaries*23
    
    Consent of the Independent Public Accountants31.1
    
    CEO Certification, pursuant to Section 30 2 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
 #
    
    Denotes compensatory plan or arrangement for Company officer or director.*
    
    Previously filed.
 52
      SIGNATURES
  HearUSA, Inc.
(Registrant)Date: May 11, 2006
    By:

/s/ Stephen J. HansbroughStephen J. HansbroughPresident and Chief Executive Officer 53