##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period
ended            April 2,
2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto Commission file number001-11655 HearUSA, Inc. 
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    22-2748248(State of Other Jurisdiction of
    
    (I.R.S.EmployerIncorporation or Organization)
    
    Identification No.)
 1250 Northpoint Parkway, West Palm Beach, Florida
    
    
    33407(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants
Telephone Number, Including Area Code
     (561) 478-8770   Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
 Indicate by check whether the registrant (1) has filed all reports required to be filed by
Section 13 or15(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. YesþNoo Indicate
by check ü whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). Yeso Noþ On April 29, 2005, 31,063,555 shares of the Registrants Common Stock and 866,347 exchangeable
shares of HEARx Canada, Inc. were outstanding.




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##### 



INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance SheetsApril 2, 2005 and December 25, 2004
    
    
    3Consolidated Statements of OperationsThree months ended April 2, 2005 and March 27, 2004
    
    
    4Consolidated Statements of Cash FlowsThree months ended April 2, 2005 and March 27, 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Conditionand Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    17Signatures
    
    
    18
 2




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##### 



Part I  Financial Information Item 1. Financial Statements HearUSA, Inc.
Consolidated Balance Sheets April 2,
    
    
    December 25,2005
    
    
    2004(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,632,439
    
    
    $
    2,615,379Restricted cash and Investment securities
    
    
    435,000
    
    
    
    435,000Accounts and notes receivable, less allowance for
doubtful accounts of $314,631 and $373,583
    
    
    5,577,348
    
    
    
    5,876,699Inventories
    
    
    610,584
    
    
    
    877,206Prepaid expenses and other
    
    
    1,135,557
    
    
    
    558,921Total current assets
    
    
    11,390,928
    
    
    
    10,363,205Property and equipment, net
    
    
    3,462,702
    
    
    
    3,493,862Goodwill
    
    
    33,706,565
    
    
    
    33,652,380Intangibles assets, net
    
    
    11,139,509
    
    
    
    11,242,444Deposits and other
    
    
    538,424
    
    
    
    549,924Total Assets
    
    $
    60,238,128
    
    
    $
    59,301,815LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    6,416,889
    
    
    $
    6,644,600Accrued expenses
    
    
    2,250,655
    
    
    
    2,303,601Accrued salaries and other compensation
    
    
    2,099,082
    
    
    
    1,982,559Current maturities of long-term debt
    
    
    4,026,109
    
    
    
    4,152,908Dividends payable
    
    
    76,631
    
    
    
    177,996Total current liabilities
    
    
    14,869,366
    
    
    
    15,261,664Long-term debt
    
    
    16,687,968
    
    
    
    17,296,125Convertible subordinated notes, net of debt discount
of $4,909,447 and $5,443,879 (Note 3)
    
    
    2,590,553
    
    
    
    2,056,121Total long-term debt and convertible subordinated notes
    
    
    19,278,521
    
    
    
    19,352,246Commitments and contingencies
    
    
    
    
    
    
    Mandatorily redeemable convertible preferred stock
    
    
    4,739,486
    
    
    
    4,709,921Stockholders equityPreferred 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
    
    
    
    2331998 Convertible (none outstanding)
    
    
    
    
    
    
    Total preferred stock
    
    
    233
    
    
    
    233Common
stock: $.10 par; 75,000,000 shares authorized
31,587,210 and 30,060,690 shares issued
    
    
    3,158,721
    
    
    
    3,006,069Stock subscription
    
    
    (412,500
    )
    
    
    (412,500
    )Additional paid-in capital
    
    
    121,777,025
    
    
    
    120,197,937Accumulated deficit
    
    
    (102,413,520
    )
    
    
    (101,968,452
    )Accumulated other comprehensive income
    
    
    1,725,937
    
    
    
    1,639,838Treasury stock, at cost:523,662 common shares
    
    
    (2,485,141
    )
    
    
    (2,485,141
    )Total stockholders equity
    
    
    21,350,755
    
    
    
    19,977,984Total Liabilities and stockholders equity
    
    $
    60,238,128
    
    
    $
    59,301,815
 See accompanying notes to the consolidated financial statements 3




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##### 



HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended April 2, 2005 and March 27, 2004 April 2,
    
    
    March 27,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Net revenues
    
    $
    20,068,401
    
    
    $
    16,934,600Operating costs and expensesCost of products sold
    
    
    5,732,039
    
    
    
    4,990,482Center operating expenses
    
    
    9,906,665
    
    
    
    9,142,814General and administrative expenses
    
    
    2,963,956
    
    
    
    2,455,249Depreciation and amortization
    
    
    546,245
    
    
    
    614,790Total operating costs and expenses
    
    
    19,148,905
    
    
    
    17,203,335Income (loss) from operations
    
    
    919,496
    
    
    
    (268,735
    )Non-operating income (expense):Interest income
    
    
    12,683
    
    
    
    3,857Interest expense (including approximately
$568,000 and $532,000 of non-cash debt
discount amortization)
    
    
    (1,183,617
    )
    
    
    (1,173,272
    )Net loss
    
    
    (251,438
    )
    
    
    (1,438,150
    )Dividends on preferred stock
    
    
    (193,630
    )
    
    
    (177,719
    )Net loss applicable to common stockholders
    
    $
    (445,068
    )
    
    $
    (1,615,869
    )Net loss applicable to common
stockholders per common share - basic
    
    $
    (0.01
    )
    
    $
    (0.05
    )Net loss applicable to common
stockholders per common share - diluted
    
    $
    (0.01
    )
    
    $
    (0.05
    )Weighted average number of shares of
common stock outstanding - basic
    
    
    30,516,331
    
    
    
    30,423,636Weighted average number of shares of
common stock outstanding - diluted
    
    
    30,516,331
    
    
    
    30,423,636
 See accompanying notes to the consolidated financial statements 4




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##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Three Months Ended April 2, 2005 and March 27, 2004 April 2,
    
    
    March 27,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Cash flows from operating activitiesNet loss
    
    $
    (251,438
    )
    
    $
    (1,438,150
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    546,245
    
    
    
    614,790Provision for doubtful accounts
    
    
    99,644
    
    
    
    62,285Debt discount amortization
    
    
    568,223
    
    
    
    531,767Principal payments on long-term debt made through
preferred pricing reductions
    
    
    (730,201
    )
    
    
    (730,201
    )Interest on Siemens Tranche D
    
    
    206,085
    
    
    
    155,683Gain on the loss/disposition of property
    
    
    (60,437
    )
    
    
    Consulting expense
    
    
    6,740
    
    
    
    Net cash provided by (used in) operating activities
before changes in non-cash working capital items
    
    
    384,861
    
    
    
    (803,826
    )(Increase) decrease in:Accounts and notes receivable
    
    
    197,612
    
    
    
    (303,260
    )Inventories
    
    
    137,149
    
    
    
    97,896Prepaid expenses and other
    
    
    (565,131
    )
    
    
    138,760Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (319,345
    )
    
    
    (2,005,642
    )Accrued salaries and other compensation
    
    
    115,085
    
    
    
    628,200Net cash used in operating activities
    
    
    (49,769
    )
    
    
    (2,247,872
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (200,547
    )
    
    
    (101,084
    )Proceeds from sales of discontinued operations
    
    
    
    
    
    
    103,327Net cash provided by (used in) investing activities
    
    
    (200,547
    )
    
    
    2,243Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    
    
    
    
    500,000Principal payments on long-term debt
    
    
    (206,094
    )
    
    
    (1,969,737
    )Proceeds from the exercise of warrants
    
    
    1,725,000
    
    
    
    Dividends on preferred stock
    
    
    (265,430
    )
    
    
    (373,007
    )Net cash provided by (used in) financing activities
    
    
    1,253,476
    
    
    
    (1,842,744
    )Effects of exchange rate changes on cash
    
    
    13,900
    
    
    
    (14,344
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,017,060
    
    
    
    (4,102,717
    )Cash and cash equivalents at beginning of period
    
    
    2,615,379
    
    
    
    6,714,881Cash and cash equivalents at end of period
    
    $
    3,632,439
    
    
    $
    2,612,164Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    266,000
    
    
    $
    170,049
 See accompanying notes to consolidated financial statements 5




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HearUSA, Inc.
Notes to Consolidated Financial Statements The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included. Operating results for
the three month period ended April 2, 2005 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2005. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in the Companys annual report on
Form 10-K for the year ended December 25, 2004. 1. Description of the Company and Summary of Significant Accounting Policies The Company HearUSA, Inc. (HearUSA or the Company), a Delaware corporation, was organized for the purpose
of creating a nationwide chain of centers to serve the needs of the hearing impaired. As of April
2, 2005, the Company has a network of 154 company-owned hearing care centers in 11 states and the
Province of Ontario, Canada. The Company also sponsors a network of approximately 1,400
credentialed audiology providers that participate in selected hearing benefit programs contracted
by the Company with employer groups, health insurers and benefit sponsors in 49 states. The
centers and the network providers provide audiological products and services for the hearing
impaired. Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned and
majority controlled subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation. Fiscal year The Companys fiscal year ends on the last Saturday in December and customarily consists of four
13-week quarters for a total of 52 weeks. Every sixth year includes 53 weeks. The current year
includes 53 weeks and the additional week is included in the first quarter of 2005. The next year
with 53 weeks will be 2011. Income (loss) per common share Net loss per common share is calculated in accordance with Statement of Financial Accounting
Standards (SFAS) No. 128 Earnings Per Share which requires companies to present basic and
diluted earnings per share. Loss per common share  basic is based on the weighted average number
of common shares outstanding during the year. Loss per common share  diluted is based on the
weighted average number of common shares and dilutive potential common shares outstanding during
the year. Due to the Companys net loss in the first quarter of 2005, the common stock equivalents
for convertible subordinated notes, mandatorily redeemable convertible preferred stock, outstanding
options and warrants to purchase common stock of 10,142,230 were excluded from the computation of
net loss per common share  diluted at April 2, 2005 because they were anti-dilutive. For purposes
of computing net loss per common share  basic and diluted, for the quarters ended April 2, 2005
and March 27, 2004, the weighted average number of shares of common stock outstanding includes the
effect of the 866,347 and 1,034,184, respectively, exchangeable shares of HEARx Canada, Inc., as if
they were outstanding common stock of the Company. 6




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HearUSA, Inc.
Notes to Consolidated Financial Statements Comprehensive income (loss) Comprehensive income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. The Companys other comprehensive income
represents a foreign currency translation adjustment. Comprehensive income (loss) and the components of other comprehensive income are as follows: Three Months EndedApril 2,
    
    
    March 27,2005
    
    
    2004Net loss for period
    
    $
    (251,438
    )
    
    $
    (1,438,150
    )Other comprehensive income:Foreign currency translation adjustments
    
    
    86,099
    
    
    
    70,484Comprehensive loss for the period
    
    $
    (165,339
    )
    
    $
    (1,367,666
    )
 Stock-based compensation The Company has granted stock options to employees and directors under stock option plans. The
Company accounts for those plans using the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based employee compensation
cost has been reflected in net loss, as all options granted under those plans had an exercise price
greater than or equal to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if the Company had applied
the fair value recognition provisions of SFAS 123 Accounting for Stock-Based Compensation, to
stock-based employee compensation (See Note 6 Recent Accounting Pronouncement): Three Months EndedApril 2,
    
    
    March 27,2005
    
    
    2004Loss applicable to common stockholdersAs reported
    
    $
    (445,068
    )
    
    $
    (1,615,869
    )Deduct: Total stock-based employeecompensation expense determined underfair value based method for all awards, net of tax effects
    
    
    (356,000
    )
    
    
    (93,000
    )Pro forma, net loss
    
    $
    (801,068
    )
    
    $
    (1,708,869
    )Loss per shareBasic-as reported
    
    $
    (0.01
    )
    
    $
    (0.05
    )Basic-pro forma
    
    $
    (0.03
    )
    
    $
    (0.06
    )Diluted-as reported
    
    $
    (0.01
    )
    
    $
    (0.05
    )Diluted-pro forma
    
    $
    (0.03
    )
    
    $
    (0.06
    )
 For purposes of the above disclosure, the determination of the fair value of stock options granted
in 2005 and 2004 was based on the following: (i) a risk free interest rate of 4.16%, and 2.23%
respectively; (ii) expected option lives ranging from 5 to 7 years; (iii) expected volatility in
the market price of the Companys common stock of 92% and 94%, respectively; and (iv) no dividends
on the underlying common stock. Reclassifications Certain amounts in the 2004 consolidated financial statements have been reclassified in order to
conform to the 2005 presentation. 7




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HearUSA, Inc.
Notes to Consolidated Financial Statements 2. Stockholders Equity Common stock During the quarter ended
April 2, 2005, 1,500,000 warrants were exercised at an exercise price of
$1.15. No employee options were granted or exercised. 3. Convertible Subordinated Notes On December 19, 2003, the Company completed a private placement of $7.5 million five-year
convertible subordinated notes with five-year warrants to purchase 2,642,750 shares of the
Companys common stock. The notes may not be converted and warrants to purchase 2,142,750 shares
may not be exercised for a two-year period. The remaining warrants to purchase 500,000 shares are
exercisable beginning in June 2005 at $1.75 per share. Beginning in December 2005 the notes may be
converted at $1.75 per share and the warrants may be exercised for up to 2,142,750 shares at $1.75
per share. The quoted closing market price of the Companys common stock on the commitment date was
$2.37 per share. The notes bear interest at 11 percent per annum for the first two years and then
at 8 percent per annum through the remainder of their term. Proceeds from this financing have been
used to repay the $2 million financing issued on October 3, 2003 and for working capital purposes.
Approximately $1.8 million of the net proceeds were used to make payments to Siemens under the
credit facility, including 50% against the Tranche D Loan and 50% against the Tranche E Loan. The Company recorded a debt discount of approximately $7,488,000 consisting of the intrinsic value
of the beneficial conversion feature of approximately $4,519,000 and the portion of the proceeds allocated
to the warrants issued to the lenders of approximately $2,969,000, using the Black-Scholes option
pricing model, based on the relative fair values of the warrants and the notes. The debt discount
is being amortized as interest expense over the five-year term of the notes using the effective
interest method. In addition to the 2,642,750 common stock purchase warrants issued to the investors in the $7.5
million financing, the Company also issued 117,143 common stock purchase warrants with the same
terms as the lender warrants and paid cash of approximately $206,000 to third parties as finder
fees and financing costs. These warrants were valued at approximately $220,000 using a
Black-Scholes option pricing model. The total of such costs of approximately $426,000 are being
amortized as interest expense using the effective interest method over the five-year term of the
notes. For the first two years of the term beginning on March 25, 2004, the Company will make quarterly
payments of interest only. Beginning on March 25, 2006, the Company will make twelve equal
quarterly payments of principal plus interest. Payments of principal and interest may be made, at
the Companys option, in cash or with the Companys common stock. If payments are made using the
Companys common stock the shares to be issued would be computed at 90% of the average closing
price for the 20 day trading period immediately preceding the payment date. Approximate annual
aggregate amount of maturities of such notes maturing in future years is $2,500,000 in each of
2006, 2007 and 2008. During the first quarter of 2005 and 2004, approximately $779,000 and $723,000, respectively, of
prepaid financing fees and debt discount was amortized as interest expense, including a non-cash
portion of approximately $568,000 and $532,000, respectively. The future non-cash debt discount and
finder fees to be amortized as interest expense over the next five years are approximately
$1,583,000 for the remainder of 2005, $1,763,000 in 2006, $1,145,000 in 2007 and $434,000 in 2008. In the
event the investors convert or exercise the debt or warrants, the Company will be required to
accelerate the debt discount to the period in which the exercise or conversion occurs. 8




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HearUSA, Inc.
Notes to Consolidated Financial Statements 4. Segments The Company operates in three business segments, which include the operation and management of
centers, the establishment, maintenance and support of an affiliated network and the operation of
an e-commerce business. The Companys business units are located in the United States and Canada. Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalNet revenues3 months ended 4/2/05
    
    $
    19,695,000
    
    
    $
    8,000
    
    
    $
    365,000
    
    
    
    
    
    
    $
    20,068,0003 months ended 3/27/04
    
    $
    16,667,000
    
    
    $
    12,000
    
    
    $
    256,000
    
    
    
    
    
    
    $
    16,935,000Income (loss) from operations3 months ended 4/2/05
    
    
    3,935,000
    
    
    
    (7,000
    )
    
    
    181,000
    
    
    
    (3,190,000
    )
    
    
    919,0003 months ended 3/27/04
    
    
    2,169,000
    
    
    
    (5,000
    )
    
    
    122,000
    
    
    
    (2,555,000
    )
    
    
    (269,000
    )3 months ended 4/2/05Depreciation and
amortization
    
    
    494,000
    
    
    
    
    
    
    
    1,000
    
    
    
    51,000
    
    
    
    546,000Identifiable assets
    
    
    47,681,000
    
    
    
    
    
    
    
    1,510,000
    
    
    
    11,047,000
    
    
    
    60,238,000Capital expenditures
    
    
    158,000
    
    
    
    
    
    
    
    
    
    
    
    43,000
    
    
    
    201,0003 months ended 3/27/04Depreciation and
amortization
    
    
    514,000
    
    
    
    
    
    
    
    1,000
    
    
    
    100,000
    
    
    
    615,000Identifiable assets
    
    
    47,893,000
    
    
    
    
    
    
    
    1,226,000
    
    
    
    11,799,000
    
    
    
    60,918,000Capital expenditures
    
    
    77,000
    
    
    
    
    
    
    
    
    
    
    
    24,000
    
    
    
    101,000
 Incomes (losses) from operations at the segment level are computed before general and
administrative expenses. Information concerning geographic areas as of and for the quarters ended April 2, 2005 and March
27, 2004 is as follows: As of April 2, 2005
    
    
    
    As of March 27, 2004United States
    
    
    
    Canada
    
    
    
    United States
    
    
    
    Canada$
    
    
    
    $
    
    
    
    $
    
    
    
    $Net revenues
    
    
    
    18,155,000
    
    
    
    
    1,913,000
    
    
    
    
    15,442,000
    
    
    
    
    1,493,000Long-lived assets
    
    
    
    39,122,000
    

    
    
    
    9,725,000
    
    
    
    
    39,945,000
    
    
    
    
    9,319,000Net assets
    
    
    
    48,188,000
    
    
    
    
    12,050,000
    
    
    
    
    50,312,000
    
    
    
    
    10,606,000
 Net revenues by geographic area are allocated based on the location of the subsidiary
operations. 9




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##### 



HearUSA, Inc.
Notes to Consolidated Financial Statements 5. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment, (FAS 123(R)). This Statement requires
companies to expense the estimated fair value of stock options and similar equity instruments
issued to employees. Currently, companies are required to calculate the estimated fair value of
these share-based payments and can elect to either include the estimated cost in earnings or
disclose the pro forma effect in the footnotes to their financial statements. We have chosen to
disclose the pro forma effect. The fair value concepts were not changed significantly in FAS
123(R); however, in adopting this Standard, companies must choose among alternative valuation
models and amortization assumptions. The valuation model and amortization assumption we have used
continues to be available, but we have not yet completed
our assessment of the alternatives. On April 14, 2005 the U.S. Securities and Exchange Commission (the SEC) announced a deferral of the
effective date of FAS 123(R) for calendar year companies until the beginning of 2006. Based on the
outstanding number of employee stock options and excluding the impact of any future grants at April
2, 2005, the total stock-based employee compensation expense determined under the fair value method
that would be reflected in the financial statements is approximately $746,000 in 2006 (See Note 1
Description of the Company and Summary of Significant Accounting Policies- Stock-Based
Compensation) and $356,000 in 2007. 6. Liquidity The working capital deficit decreased $1.4 million to $3.5 million as of April 2, 2005 from $4.9
million as of December 25, 2004. The working capital deficit of $3.5 million includes
approximately $2.9 million representing the current portion of the long-term debt to Siemens for
Tranches A, B and C, which may be repaid through preferred pricing reductions. In the first
quarter of 2005, cash used by operations decreased from $2,248,000 in
2004 to $50,000 in 2005. Cash and cash equivalents as of April 2, 2005 was
approximately $3.6 million. The Company believes that current cash and cash equivalents and cash flow from operations, at
current net revenue levels, will be sufficient to support the Companys operational needs through
the next twelve months, although there can be no assurance that the Company can maintain compliance
with the Siemens loan covenants, that net revenue levels will remain at or higher than current
levels or that unexpected cash needs will not arise for which the cash, cash equivalents and cash
flow from operations will not be sufficient. In the event of a shortfall in cash, the Company
might consider short-term debt, or additional equity or debt offerings. There can be no assurance
however, that such financing will be available to the Company on favorable terms or at all. The
Company also is continuing its aggressive cost controls and sales and gross margin improvements. Forward Looking Statements This Form 10-Q and, in particular, this management discussion and analysis contain or
incorporate a number of forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Act of 1934. These statements include
those relating to the Companys belief that its current cash and cash equivalents and cash flow
from operations at current net revenue levels will be sufficient to support the Companys
operational needs through the next twelve months. 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. We do not intend to
update publicly any forward-looking statements whether as a result of new information, future
events or otherwise. 10




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations GENERAL The Companys fiscal year ends on the last Saturday in December and customarily consists of four
13-week quarters for a total of 52 weeks. Every sixth year includes 53 weeks. The current year
includes 53 weeks and the additional week is included in the first quarter of 2005. In the first quarter of 2005, the Company incurred a net loss applicable to common stockholders of
approximately $445,000, compared to approximately $1.6 million in the same period in 2004. This
improvement is attributable to an increase in net revenues, impacted by the additional week
discussed above, and an improvement in cost of product sold, as a
percent of revenues, which all together positively impacted net
income. However, these improvements were somewhat offset by an increase in center operating
expenses and general and administrative expenses increases which were also partially the result of
the additional week in the reporting period. The net loss for the first quarter of each of 2005 and
2004 includes a non-cash interest expense of approximately $568,000 and $532,000, respectively,
representing the amortization of the debt discount related to the $7.5 million convertible
subordinated notes financing. During the first quarter of
2005, HEARx West members generated net income of approximately $525,000. The
HEARx West members deficit decreased from approximately $3,206,000 at the end of 2004 to approximately
$2,681,000 at the end of the first quarter of 2005. According to the Companys agreement with the
Permanente Federation, the Company included in its statement of operations 100% of the losses
incurred by the venture since its inception and will receive 100% of the net income of the venture
until the members deficit is eliminated. At such time as the members deficit is eliminated and
the Venture continues to be profitable, the Company will begin recording a minority interest,
corresponding to 50% of the ventures net income as an expense in the Companys consolidated
statement of operations and with a corresponding liability on its consolidated balance sheet. RESULTS OF OPERATIONS For the three months ended April 2, 2005 compared to the three months ended March 27, 2004 Net revenues in the first quarter of 2005 increased approximately $3.1 million, or 18.5%, compared
to the first quarter of 2004. This increase is primarily attributable to an increase in hearing
aid revenues of approximately $2.6 million during 2005 compared to 2004. The increase in hearing
aid revenue is mainly due to an increase of 9.1% in the number of hearing aids sold, coupled with
an increase in the average selling price of 7.7% in the first quarter of 2005 compared to 2004, as
patients selected a higher percentage of high end technology hearing aids. Of the total increase
in net revenues, approximately $1.4 million resulted from the additional week in the first quarter
of 2005. Approximately $132,000 of the overall increase in revenues relates to a favorable change
in the average Canadian exchange rate from 2005 to 2004. Cost of products sold in the first quarter of 2005 increased approximately $742,000, or 14.9%,
compared to the first quarter of 2004. Included in the cost of products sold are Siemens preferred
pricing reductions of approximately $862,000 (including $132,000 of
interest and $730,000 of principal) in the first quarter of 2005 and
$938,000 (including $208,000 of
interest and $730,000 of principal) for the
first quarter 2004. Such pricing reductions from Siemens are accounted for as reductions of cost of
products sold for financial reporting purposes and applied, pursuant to the Siemens credit
agreement, against the principal and interest payments due on Tranches A, B and C of the Siemens
loan. Most of these pricing reductions, according to the current
agreement will expire mid 2006. The cost of
products sold as a percent of net revenues was 28.6% and 29.5% for the first quarter 2005 and the
first quarter 2004, respectively. This improvement was due to an additional rebate received during
the 2005 quarter from Siemens. 11




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##### 



Center operating expenses increased approximately $764,000, or 8.4%, in the first quarter of 2005
compared to the first quarter of 2004. $547,000 of this increase is due to the additional week in
the quarter. The remaining increase of $217,000 is mainly attributable to an increase in
commission related to the increase in revenues. General and administrative expenses in the first quarter of 2005 increased approximately $509,000,
or 20.7%, compared to the first quarter of 2004. $211,000 of this increase is due to the
additional week in the quarter. The remaining increase of $298,000 is mainly attributable to an
increase in wages and fringe benefits and professional fees in 2005 compared to 2004. Depreciation and amortization expense decreased $69,000 or 11.1% in 2005. This decrease is due to
certain property and equipment being fully depreciated. Interest expense in the first quarter of 2005 remained constant as compared to the first quarter in
2004. The non-cash charge of $568,000 included in the interest expense is the amortization of the debt
discount related to $7.5 million convertible subordinate debt (see Note 3- Convertible Subordinate
Notes). This is a non-cash charge and does not have an impact on the liquidity and working capital
of the Company. LIQUIDITY AND CAPITAL RESOURCES 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); (d) a $13,000,000 five-year secured 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. At April 2, 2005, $3,024,987, $57,200, $1,350,000, $13,796,369 and
$2,028,103, representing principal on the Tranche A, Tranche B, Tranche C, Tranche D, and Tranche E
Loans, respectively, were outstanding. As of April 2, 2005, approximately $24.9 million is
available to the Company for acquisitions under Tranche B of the credit facility. The Tranche A, B and C Loans are payable quarterly over five years with the outstanding principal
and interest at 10%, due and payable on the final maturity date. Principal and interest, at the
prime rate (as defined) plus 1%, on the Tranche D Loan is payable on the final maturity date. The
Company is required to make monthly payments of interest only on the Tranche E Loan in the first
year. In years two through five, the Company must make monthly principal and interest payments.
Quarterly principal and interest payments on the Tranche A, B and C Loans may be paid through
preferred pricing reductions received from Siemens by HearUSA as long as the Company purchases
certain minimum percentages of its hearing aids requirements from Siemens. During the first
quarters of 2005 and 2004, approximately $862,000 and $938,000 of earned preferred pricing
reductions were recorded as a reduction of cost of products sold. In the first quarters of 2005 and 2004, $132,000 and $208,000 of interest payable,
and $730,000 and $730,000 of principal, respectively, has been paid through such preferred pricing
reductions. The Company is also required to make additional payments on the Tranche D Loan under
the following conditions: The Company must make a payment equal to 25% of net proceeds it receives
from the issuance of stock or stock equivalents. In addition, within 120 days of any fiscal year,
the Company must make a payment equal to 20% of Excess Cash Flow (as defined in the credit
agreement) for such fiscal year end. The total of payments in 2005 based on 2004 Excess Cash Flow
will be approximately $178,000, and is included as a current maturity of Tranche D. 12




---



##### 



The Siemens credit facility imposes certain financial and other covenants on the Company, which
are customary for loans of this size and nature, including restrictions on the conduct of the
Companys business, the incurrence of indebtedness, merger or sale of assets, the modification of
material agreements, changes in capital structure, making certain payments and paying dividends.
If the Company cannot maintain compliance with these covenants, Siemens may terminate future
funding under the credit facility and declare all then outstanding amounts under the facility
immediately due and payable. Also, the Companys supply agreement with Siemens requires full
payment for hearing aids purchased from Siemens within 60 days from statement date. As of April 2,
2005, the Company was in compliance with those payment provisions. Upon noncompliance, Siemens may
declare the Company to be in default of the supply agreement by written notification, which, if not
cured within 60 days of the date of written notification, would be an event of default under the
Companys credit facility with Siemens and Siemens would have the right to declare all amounts
outstanding under the credit facility immediately due and payable. Any non-compliance with the
supply agreement could have a material adverse effect on the Companys financial condition and
continued operations. The working capital deficit decreased $1.4 million to $3.5 million as of April 2, 2005 from $4.9
million as of December 25, 2004. The working capital deficit of $3.5 million includes
approximately $2.9 million representing the current portion of the long-term debt to Siemens for
Tranches A, B and C, which may be repaid through the preferred pricing reductions. In the first
quarter of 2005, cash used by operations decreased from $2,248,000 in
2004 to $50,000 in 2005. Cash and cash equivalents as of April 2, 2005
was approximately $3.6 million. The Company believes that current cash and cash equivalents and cash flow from operations, at
current net revenue levels, will be sufficient to support the Companys operational needs through
the next twelve months, although there can be no assurance that the Company can maintain compliance
with the Siemens loan covenants, that net revenue levels will remain at or higher than current
levels or that unexpected cash needs will not arise for which the cash, cash equivalents and cash
flow from operations will be sufficient. In the event of a shortfall in cash, the Company
might consider short-term debt, or additional equity or debt offerings. There can be no assurance,
however, that such financing will be available to the Company on favorable terms or at all. The
Company also is continuing its aggressive cost controls and focus on sales and
gross margin improvements.
Below is a chart setting forth the Companys contractual cash payment obligations which have been
aggregated to facilitate a basic understanding of the Companys liquidity as of April 2, 2005: Payments due by periodLess
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsLong-term debt (1)
    
    $
    20,714,000
    
    
    $
    3,869,000
    
    
    $
    16,652,000
    
    
    $
    193,000
    
    
    $
    Interest to be paid on long-term debt (2)
    
    
    793,000
    
    
    
    445,000
    
    
    
    345,000
    
    
    
    3,000
    
    
    
    Operating leases
    
    
    14,273,000
    
    
    
    5,502,000
    
    
    
    7,677,000
    
    
    
    1,094,000
    
    
    
    Convertible subordinated notes (3)
    
    
    7,500,000
    
    
    
    
    
    
    
    5,000,000
    
    
    
    2,500,000
    
    
    
    Interest to be paid on convertible
subordinated notes
    
    
    1,541,000
    
    
    
    614,000
    
    
    
    927,000
    
    
    
    
    
    
    
    Manditorily redeemable convertible
preferred stock and redemption premiums
(4)
    
    
    4,928,000
    
    
    
    
    
    
    
    4,928,000
    
    
    
    
    
    
    
    Dividends to be paid on manditorily
redeemable convertible preferred stock
    
    
    823,000
    
    
    
    342,000
    
    
    
    481,000
    
    
    
    
    
    
    
    Employment agreements
    
    
    1,719,000
    
    
    
    377,000
    
    
    
    1,342,000Purchase obligations
    
    
    1,116,000
    
    
    
    576,000
    
    
    
    540,000
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    53,407,000
    
    
    $
    11,725,000
    
    
    $
    37,892,000
    
    
    $
    3,790,000
    
    
    $
    
   (1)
    
    Approximately $4.4 million (Tranches A, B and C) can be repaid through preferred pricing
reductions from Siemens, including $2.9 million in less than 1 year, $1.5 million in years
1-3. 13




---



##### 



(2)
    
    Interest on long-term debt excludes $2,020,000 of accrued but unpaid interest on Tranche D
presented with long-term debt in (1) above. In addition, approximately $420,000 of interest
on Tranches A, B, C can be repaid through preferred pricing reductions.(3)
    
    When due, these notes and corresponding interest can be repaid at the option of the Company in
common stock.(4)
    
    Includes approximately $365,000 of the 8% premium payable upon redemption in December 2006,
of which $176,000 has been accreted as of April 2, 2005. Net cash used in operating activities improved from $2.2 million used in the first quarter of 2004
to approximately $50,000 used in the first quarter of 2005. The improvement was primarily the
result of the reduction of $1.2 million in the net loss between periods which was offset by a net
increase in accounts receivable, inventories and prepaid expenses of approximately $230,000 in
2005, compared to a net increase of approximately $67,000 in 2004. A net decrease in accounts
payable, accrued expenses and accrued compensation of approximately $204,000 in 2005, compared to a
net decrease of approximately $1.4 million in 2004. The first quarter of 2005 net increase of $230,000 in accounts receivable, inventories and prepaid
expenses is mainly attributable to an increase of prepaid expenses of approximately $565,000 due to
the timing of our accounting period end, offset by a reduction of approximately $198,000 in
accounts receivable due to the improvement in collection and inventories of approximately $137,000
due to timing of our accounting period end. The reduction in accounts payable, accrued expenses
and accrued compensation in the first quarter of 2005 as compared to
the 2004 period is also due to the timing of our accounting period
end. Net cash from investing activities of approximately $201,000 was used in the first quarter of 2005
to purchase equipment. Net cash from financing activities decreased from approximately $1.8 million used in the first
quarter of 2004 to approximately $1.3 million provided in the first quarter of 2005. This decrease
is related to the payment of $1.8 million made to Siemens in January of 2004 on Tranches D and E.
In March 2005 proceeds of $1.7 million were received for
the exercise of warrants issued in the March
29, 2002 private placement. CRITICAL ACCOUNTING POLICIES Management believes the following critical accounting policies affect the significant judgments and
estimates used in the preparation of the financial statements: Goodwill The majority of the Companys goodwill resulted from the combination with Helix. On an annual
basis, the Company is required to assess whether its goodwill is impaired. The Company elected to
perform this analysis on the first day of its fourth quarter in 2004. In order to do this,
management applied judgment in determining its reporting units, which represent distinct parts of
the Companys business. The reporting units determined by management are the centers, the network
and e-commerce. The definition of the reporting units affects the Companys goodwill impairment
assessments. The annual goodwill impairment assessment involves estimating the fair value of a reporting unit and comparing
it with its carrying amount. If the carrying value of the reporting unit exceeds its fair value,
additional steps are required to calculate a potential impairment charge. Calculating the fair
value of the reporting units requires significant estimates and long-term assumptions. The Company
utilized an independent appraisal firm to test goodwill for impairment as of the first day of the
Companys fourth quarter of 2003 and 2004, and each of these tests indicated no impairment. The
Company estimates the fair value of its reporting units by applying a weighted average of three
methods: quoted market price, external transactions, and discounted cash flow. Significant changes
in key assumptions about the business and its prospects, or changes in market conditions, stock
price, interest rates or other externalities, could result in an impairment charge. 14




---



##### 



Revenue recognition Revenues from the sale of audiological products are recognized at the time of delivery to the
patient. Revenues from hearing care services are recognized at the time those services are
performed. The Company has capitation contracts with certain health care organizations under which the Company
is paid an amount for each enrollee of the health maintenance organization to provide to the
enrollee a discount on certain hearing products and services. The amount paid to the Company by
the healthcare organization is calculated on a per-capita basis and is referred to as capitation
revenue. Capitation revenue is earned as a result of agreeing to provide services to members
without regard to the actual amount of service provided. Revenue is recorded in the period that the
beneficiaries are entitled to health care services. Allowance for doubtful accounts Certain of the accounts receivable of the Company are from health insurance and managed care
organizations and government agencies. These organizations could take up to nine months before
paying a claim made by the Company and also impose a limit on the time the claim can be billed.
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible
amounts. That estimate is based on historical collection experience, current economic and market
conditions, and a review of the current status of each organizations trade accounts receivable. In order to calculate that allowance, the Company first identifies any known uncollectible amounts
in its accounts receivable listing and charges them against the existing allowance for doubtful
accounts. Then a specific percent per plan and per aging categories is applied against the
remaining receivables to estimate the new allowance. Any changes in the percent assumptions per
plan and aging categories could result in a change in the allowance for doubtful accounts. For
example, an increase of 10% in the percent used would increase the allowance for doubtful accounts
by approximately $15,000. Sales returns The Company provides to all patients purchasing hearing aids a specific return period of at least
30 days if the patient is dissatisfied with the product. The Company provides an allowance in
accrued expenses for returns. The return period can be extended to 60 days if the patient attends
the Companys H.E.L.P. program. The Company calculates its allowance for returns using estimates
based upon actual historical returns. The cost of the hearing aid is reimbursed to the Company by
the manufacturer. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment,
(FAS 123(R)). This Statement requires
companies to expense the estimated fair value of stock options and similar equity instruments
issued to employees. Currently, companies are required to calculate the estimated fair value of
these share-based payments and can elect to either include the estimated cost in earnings or
disclose the pro forma effect in the footnotes to their financial statements. We have chosen to
disclose the pro forma effect. The fair value concepts were not
changed significantly in FAS 123(R); however, in adopting this Standard,
companies must choose among alternative valuation models and amortization assumptions. The
valuation model and amortization assumption we have used continues to be available, but we have not
yet completed our assessment of the alternatives. On April 14, 2005 the U.S. Securities and
Exchange Commission (the SEC) announced a deferral of the
effective date of FAS 123(R) for
calendar year companies until the beginning of 2006. Based on the outstanding number of employee
stock options and excluding the impact of any future grants at April 2, 2005, the total stock-based
employee compensation expense determined under the fair value method that would be reflected in the
financial statements is approximately $746,000 in 2006 (See Note 1 Description of the Company and
Summary of Significant Accounting Policies- Stock-Based Compensation) and $356,000 in 2007. 15




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not engage in derivative transactions. The Company is exposed to Canadian currency
exchange rates and the Company is not hedging that exposure. Differences in the fair value of
investment securities are not material; therefore the related market risk is not significant. The
Companys exposure to market risk for changes in interest rates relates primarily to the Companys
long-term debt. The following table presents the Companys financial instruments for which fair
value is subject to changing market interest rates: Long-Term Debt and Convertible Subordinated NotesVariable Rate
    
    
    
    
    
    
    
    
    
    
    
    Fixed RatePrime Rate
    
    
    
    Yr 1  2
11%+ 1% note
    
    
    
    Yr 3  5
8%
    
    

    

    

    
    
    
    
    
    
    10 % notedue April
    
    
    
    due November
    
    
    10 % notes
    
    
    10 % notes
    
    
    due Dec 1,As of April 2, 2005:
    
    2007
    
    
    
    2008
    
    
    due 2008
    
    
    due 2007
    
    
    2006
    
    
    Other notes
    
    
    
    TotalEstimated cash
inflow (outflow) by
fiscal year of
principal maturity
    
    
    $
    
    
    
    
    $
    

    
    
    $
    
    

    
    $
    
    
    
    $
    
    

    
    $
    
    
    
    
    $2005
    
    
    (142,000
    )
    
    
    
    
    
    
    
    (452,000
    )
    
    
    (466,000
    )
    
    
    (1,725,000
    )
    
    
    (348,000
    )
    
    
    
    (3,133,000
    )2006
    
    
    
    
    
    
    
    (2,500,000
    )
    
    
    (657,000
    )
    
    
    (621,000
    )
    
    
    (1,300,000
    )
    
    
    (53,000
    )
    
    
    
    (5,131,000
    )2007
    
    
    (13,654,000
    )
    
    
    
    (2,500,000
    )
    
    
    (726,000
    )
    
    
    (320,000
    )
    
    
    
    
    
    
    (57,000
    )
    
    
    
    (17,257,000
    )2008
    
    
    
    
    
    
    
    (2,500,000
    )
    
    
    (193,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,693,000
    )2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (13,796,000
    )
    
    
    
    (7,500,000
    )
    
    
    (2,028,000
    )
    
    
    (1,407,000
    )
    
    
    (3,025,000
    )
    
    
    (458,000
    )
    
    
    
    (28,214,000
    )Estimated fair value
    
    
    (13,796,000
    )
    
    
    
    (7,500,000
    )
    
    
    (2,028,000
    )
    
    
    (1,407,000
    )
    
    
    (3,025,000
    )
    
    
    (458,000
    )
    
    
    
    (28,214,000
    )Carrying Value
    
    
    (13,796,000
    )
    
    
    
    (7,500,000
    )
    
    
    (2,028,000
    )
    
    
    (1,407,000
    )
    
    
    (3,025,000
    )
    
    
    (458,000
    )
    
    
    
    (28,214,000
    )
 Item 4. Controls and Procedures The Companys management, with the participation of the Companys chief executive officer and chief
financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of April 2,
2005. Based on this evaluation, the Companys chief executive officer and chief financial officer
concluded that, as of April 2, 2005, the Companys disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company, including its consolidated
subsidiaries, is made known to the Companys chief executive officer and chief financial officer by
others within those entities, particularly during the period in which this report was being
prepared and (2) effective, in that they provide reasonable assurance that information required to
be disclosed by the Company in the reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms. No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended April 2, 2005 that
has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 16




---



##### 



PART II Item 6. Exhibits 2.1
    
    Plan of Arrangement, including exchangeable share provisions (incorporated herein
by reference to Exhibit 2.3 to the Companys Joint Proxy Statement/Prospectus on
Form S-4 (Reg. No. 333-73022)).3.1
    
    Restated Certificate of Incorporation of HEARx Ltd., including certain certificates
of designations, preferences and rights of certain preferred stock of the Company
(incorporated herein by reference to Exhibit 3 to the Companys Current Report on
Form 8-K, filed May 17, 1996 (File No. 001-11655)).3.2
    
    Amendment to the Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1A to the Companys Quarterly Report on Form 10-Q for the
period ended June 28, 1996 (File No. 001-11655)).3.3
    
    Amendment to Restated Certificate of Incorporation including one for ten reverse
stock split and reduction of authorized shares (incorporated herein to Exhibit 3.5
to the Companys Quarterly Report on Form 10-Q for the period ending July 2, 1999
(File No. 001-11655)).3.4
    
    Amendment to Restated Certificate of Incorporation including an increase in
authorized shares and change of name (incorporated herein by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K, filed July 17, 2002 (File No.
001-11655)).3.5
    
    Certificate of Designations, Preferences and Rights of the Companys 1999 Series H
Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4
to the Companys Current Report on Form 8-K, filed December 17, 1999 (File No.
001-11655)).3.6
    
    Certificate of Designations, Preferences and Rights of the Companys Special Voting
Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Companys
Current Report on Form 8-K, filed July 19, 2002 (File No. 001-11655)).3.7
    
    Amendment to Certificate of Designations, Preferences and Rights of the Companys
1999 Series H Junior Participating Preferred Stock ((incorporated herein by
reference to Exhibit 4 to the Companys Current Report on Form 8-K, filed July 17,
2002 (File No. 001-11655)).3.8
    
    Certificate of Designations, Preferences and Rights of the Companys 1998-E
Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed August 28, 2003 (File No. 001-11655)).3.9
    
    Amendment of Restated Certificate of Incorporation (increasing authorized capital)
(incorporated herein by reference to Exhibit 3.9 to the Companys Quarterly Report
on Form 10-Q, filed August 8, 2004.)3.10
    
    Amended and Restated By-Laws of
HearUSA, Inc. ((incorporated by reference to Exhibit 3.9 to the
Companys Annual Report on Form 10-K for the fiscal year ended
December 27, 2003 (File No. 001-11655)).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 as 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 as 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 as 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 as Exhibit 9.1 to the Companys Joint Proxy
Statement/Prospectus on Form S-4 (Reg. No. 333-73022)).31.1
    
    CEO Certification, pursuant to Section 302of 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
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized. HearUSA Inc.
(Registrant)May 10, 2005/s/ Stephen J. HansbroughStephen J. Hansbrough
Chief Executive OfficerHearUSA, Inc./s/ Gino ChouinardGino ChouinardChief Financial OfficerHearUSA, Inc.
 18