##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 27, 2004 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 number 0-16453 HearUSA, Inc. 
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    22-2748248(State of Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 1250 Northpoint Parkway, West Palm Beach, Florida
    
    
    33407(Address of Principal Executive Offices)
    
    
    (Zip Code)
 Registrants
Telephone Number, Including Area Code (561) 478-8770   Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
 Indicate
by check Ö whether the registrant (1) has filed all reports
required to be filed by Section 13 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 Ö whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YesoNoþ On April 30, 2004, 29,672,848 shares of the Registrants Common Stock and
750,788 exchangeable shares of HEARx Canada, Inc. were outstanding.




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##### 



INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets March 27, 2004 and December 27, 2003
    

3Consolidated Statements of Operations Three months ended March 27, 2004 and March 29, 2003
    

4Consolidated Statements of Cash Flows Three months ended March 27, 2004 and March 29, 2003
    

5Notes to Consolidated Financial Statements
    
    6-11Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    12-16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    17Item 4.
    
    Controls and Procedures
    
    17PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    18-19Signatures
    
    20
 2




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##### 



Part I  Financial Information Item 1. Financial Statements HearUSA, Inc.
Consolidated Balance Sheets March 27,
    
    December 27,2004
    
    2003(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,612,164
    
    
    $
    6,714,881Investment securities
    
    
    435,000
    
    
    
    435,000Accounts and notes receivable, less allowance for
doubtful accounts of $418,309 and $490,881
    
    
    6,117,695
    
    
    
    6,539,149Inventories
    
    
    881,274
    
    
    
    979,092Prepaid expenses and other
    
    
    948,328
    
    
    
    1,115,393Total current assets
    
    
    10,994,461
    
    
    
    15,783,515Property and equipment, net
    
    
    4,579,569
    
    
    
    4,969,265Goodwill
    
    
    33,229,262
    
    
    
    33,222,779Intangibles assets, net
    
    
    11,455,467
    
    
    
    11,577,097Deposits and other
    
    
    658,971
    
    
    
    630,694$
    60,917,730
    
    
    $
    66,183,350LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    4,837,091
    
    
    $
    6,750,234Accrued expenses
    
    
    2,417,548
    
    
    
    2,492,094Accrued salaries and other compensation
    
    
    2,345,467
    
    
    
    1,706,252Current maturities of long-term debt
    
    
    4,678,934
    
    
    
    6,436,271Dividends payable
    
    
    505,958
    
    
    
    728,699Total current liabilities
    
    
    14,784,998
    
    
    
    18,113,550Long-term debt
    
    
    19,798,372
    
    
    
    20,579,977Commitments and contingencies
    
    
    
    
    
    
    -Convertible subordinated notes, net of debt discount of
$6,928,411 and $7,423,596 (Note 3)
    
    
    571,589
    
    
    
    76,404Mandatorily redeemable convertible preferred stock
    
    
    4,627,561
    
    
    
    4,600,107Stockholders equityPreferred stock (Aggregate liquidation preference
$2,330,000; $1 par,
5,000,000 shares authorized)Series H Junior Participating (0 shares outstanding)
    
    
    
    
    
    
    Series J (233 shares outstanding)
    
    
    233
    
    
    
    2331998 Convertible (0 shares outstanding)
    
    
    
    
    
    
    Total preferred stock
    
    
    233
    
    
    
    233Common stock: $.10 par; 50,000,000 shares authorized
29,912,930 and 29,528,432 shares issued
    
    
    2,991,293
    
    
    
    2,952,845Stock subscription
    
    
    (412,500
    )
    
    
    (412,500
    )Additional paid-in capital
    
    
    120,195,853
    
    
    
    120,226,050Accumulated deficit
    
    
    (100,117,660
    )
    
    
    (98,501,791
    )Accumulated other comprehensive income
    
    
    963,132
    
    
    
    1,033,616Treasury stock, at cost:523,662 and 523,662 common shares
    
    
    (2,485,141
    )
    
    
    (2,485,141
    )Total stockholders equity
    
    
    21,135,210
    
    
    
    22,813,312$
    60,917,730
    
    
    $
    66,183,350
 See accompanying notes to the consolidated financial statements 3




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##### 



HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended March 27, 2004 and March 29, 2003 March 27,
    
    March 29,2004
    
    2003(unaudited)
    
    (unaudited)Net revenues
    
    $
    16,934,600
    
    
    $
    17,411,728Operating costs and expensesCost of products sold
    
    
    4,990,482
    
    
    
    4,816,239Center operating expenses
    
    
    9,142,814
    
    
    
    8,415,702General and administrative expenses
    
    
    2,455,249
    
    
    
    2,446,128Depreciation and amortization
    
    
    614,790
    
    
    
    908,918Total operating costs and expenses
    
    
    17,203,335
    
    
    
    16,586,987Income (loss) from operations
    
    
    (268,735
    )
    
    
    824,741Non-operating income (expense):Interest income
    
    
    3,857
    
    
    
    4,218Interest expense (including approximately $532,000
and $0 of non-cash debt discount amortization)
    
    
    (1,173,272
    )
    
    
    (522,885
    )Income (loss) from continuing operations
    
    
    (1,438,150
    )
    
    
    306,074Discontinued operationsIncome from discontinued operations
    
    
    
    
    
    
    43,478Net income (loss)
    
    
    (1,438,150
    )
    
    
    349,552Dividends on preferred stock
    
    
    (177,719
    )
    
    
    (148,324
    )Net income (loss) applicable to common stockholders
    
    $
    (1,615,869
    )
    
    $
    201,228Net income (loss) from continuing operations,
including dividends on preferred stock, per common
share  basic
    
    $
    (0.05
    )
    
    $
    0.01Net income (loss) from continuing operations,
including dividends on preferred stock, per common
share  basic diluted
    
    $
    (0.05
    )
    
    $
    0.00Net income (loss) applicable to common
stockholders per common share  basic
    
    $
    (0.05
    )
    
    $
    0.01Net income (loss) applicable to common
stockholders per common share  diluted
    
    $
    (0.05
    )
    
    $
    0.00Weighted average number of shares of common stock
outstanding  basic
    
    
    30,423,636
    
    
    
    30,426,106Weighted average number of shares of common stock
outstanding  diluted
    
    
    30,423,636
    
    
    
    55,836,097
 See accompanying notes to the consolidated financial statements 4




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##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Three Months Ended March 27, 2004 and March 29, 2003 March 27,
    
    March 29,2004
    
    2003(unaudited)
    
    (unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    (1,438,150
    )
    
    $
    349,552Loss from discontinued operations
    
    
    
    
    
    
    43,478Net income (loss) from continuing operations
    
    
    (1,438,150
    )
    
    
    306,074Adjustments to reconcile net (loss) gain to net cash (used in)
provided by operating activities:Depreciation and amortization
    
    
    614,790
    
    
    
    908,918Provision for doubtful accounts
    
    
    62,285
    
    
    
    37,750Debt discount amortization
    
    
    531,767
    
    
    
    Principal payments on long-term debt made through
preferred pricing reductions
    
    
    (730,201
    )
    
    
    (725,001
    )Interest on Siemens Tranche D
    
    
    155,683
    
    
    
    192,506(Increase) decrease in:Accounts and notes receivable
    
    
    (303,260
    )
    
    
    (829,551
    )Inventories
    
    
    97,896
    
    
    
    (105,943
    )Prepaid expenses and other
    
    
    138,760
    
    
    
    (114,906
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (2,005,642
    )
    
    
    2,552,511Accrued salaries and other compensation
    
    
    628,200
    
    
    
    (748,712
    )Net cash (used in) provided by continuing operations
    
    
    (2,247,872
    )
    
    
    1,743,646Net cash (used in) provided by discontinued operations
    
    
    
    
    
    
    135,711Net cash (used in) provided by operations
    
    
    (2,247,872
    )
    
    
    1,609,357Cash flows from investing activitiesPurchase of property and equipment
    
    
    (101,084
    )
    
    
    (106,360
    )Capital expenditures of discontinued operations
    
    
    
    
    
    
    (7,598
    )Proceeds from sales of discontinued operations
    
    
    103,327
    
    
    
    Net cash provided by (used in) investing activities
    
    
    2,243
    
    
    
    (113,958
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    500,000
    
    
    
    3,500,000Payments on long-term debt from discontinued operations
    
    
    
    
    
    
    (13,981
    )Principal payments on long-term debt
    
    
    (1,969,737
    )
    
    
    (338,306
    )Proceeds from exercise of employee stock options
    
    
    
    
    
    
    (1,700
    )Dividends on preferred stock
    
    
    (373,007
    )
    
    
    (234,950
    )Net cash provided by (used in) financing activities
    
    
    (1,842,744
    )
    
    
    2,911,063Effects of exchange rate changes on cash
    
    
    (14,344
    )
    
    
    52,345Net increase (decrease) in cash and cash equivalents
    
    
    (4,102,717
    )
    
    
    4,458,807Cash and cash equivalents at beginning of period
    
    
    6,714,881
    
    
    
    2,410,023Cash and cash equivalents at end of period
    
    $
    2,612,164
    
    
    $
    6,868,830Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    170,049
    
    
    $
    25,545Supplemental schedule of non-cash investing and financing
activities:Issuance of capital lease in exchange for property and equipment
    
    
    
    
    
    
    315,887
 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 March 27,
2004 are not necessarily indicative of the results that may be expected for the
year ending December 25, 2004. 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 27, 2003. 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 March 27, 2004, the Company has a
network of 156 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. Income (loss) per common share Net income (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. Net income
(loss) per common share  basic is based on the weighted average number of
common shares outstanding during the year. Net income (loss) per common share
 diluted is based on the weighted average number of common shares and dilutive
potential common shares outstanding during the year. Convertible subordinated
notes, mandatorily redeemable convertible preferred stock, convertible
preferred stock, stock options and stock warrants are excluded from the
computations of net loss per common share because the effect of their inclusion
would be anti-dilutive. Due to the Companys net loss in the first quarter of 2004, the following
common stock equivalents for convertible subordinated notes, mandatorily
redeemable convertible preferred stock, outstanding options and warrants to
purchase common stock of 9,500,768 were excluded from the computation of net
loss per common share  diluted at March 27, 2004 because they were
anti-dilutive. For purposes of computing net income (loss) per common share 
basic and diluted, for the quarters ended March 27, 2004 and March 29, 2003,
the weighted average number of shares of common stock outstanding includes the
effect of the 750,788 and 3,456,793, respectively, exchangeable shares of HEARx
Canada, Inc., as if they were outstanding common stock of the Company on June
30, 2002, the effective date of the combination with Helix for financial
reporting purposes. Comprehensive income Comprehensive income is defined to include all changes in equity except those
resulting from 6




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HearUSA,
Inc.
Notes to Consolidated Financial Statements 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 EndedMarch 27,
    
    March 29,2004
    
    2003Net income (loss) for period
    
    $
    (1,438,150
    )
    
    $
    349,552Other comprehensive income:Foreign currency translation adjustments
    
    
    70,484
    
    
    
    216,742Comprehensive income (loss) for the period
    
    $
    (1,367,666
    )
    
    $
    566,294
 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. Stock-based employee compensation cost reflected in net
income (loss) is not significant, 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 income (loss) and income (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, (SFAS 123) Accounting for
Stock-Based Compensation, to stock-based employee compensation: Three Months EndedMarch 27,
    
    March 29,2004
    
    2003Net income (loss) applicable to common stockholders
As reported
    
    $
    (1,615,869
    )
    
    $
    201,228Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (93,000
    )
    
    
    (45,000
    )Pro forma
    
    $
    (1,708,869
    )
    
    $
    156,228Income (loss) per share  basic and dilutedAs reported
    
    $
    (0.05
    )
    
    $
    0.01Pro forma
    
    $
    (0.06
    )
    
    $
    0.01
 For purposes of the above disclosure, the determination of the fair value of
stock options granted in 2004 and 2003 was based on the following: (i) a risk
free interest rate of 2.23%, and 3.42% 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 94% and 95%, respectively; and (iv) no dividends on
the underlying common stock. Reclassifications Certain amounts in the 2003 consolidated financial statements have been
reclassified in order to conform to the 2004 presentation. 2. Stockholders Equity 7




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HearUSA,
Inc.
Notes to Consolidated Financial Statements Common stock During the quarter ended March 27, 2004, 75,000 employee options were issued at
an exercise price of $2.31 and no employee options or warrants were 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. In addition approximately $1.8 million of
the net proceeds were used to make payments to Siemens in early fiscal 2004
under the Credit Agreement, including 50% against the Tranche D Loan and 50%
against the Tranche E Loan. The balance of the net proceeds was used for
working capital. As of December 27, 2003, $500,000 of the financing proceeds
was recorded as a subscription receivable under the caption accounts and notes
receivable in the accompanying consolidated balance sheet, and was received in
January 2004. For the first two years of the term of the convertible subordinated notes,
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 interest and
principal 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
aggregate amount of maturities of the convertible subordinated notes maturing
in future years as of March 27, 2004, is $2,500,000 in each of 2006, 2007 and
2008. 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. The
Company recorded a debt discount of approximately $7,488,000 consisting of
the intrinsic value of the beneficial conversion 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. During the first quarter of 2004, approximately $723,000 of prepaid financing
fees and debt discount was amortized as interest expense, including a non-cash
portion of approximately $532,000. The future amortization non-cash debt discount and
prepaid finder fees will be amortized as interest expense over the next five
years are approximately $1,595,000 for the remainder of 2004, $2,151,000 in
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 8




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##### 



HearUSA,
Inc.
Notes to Consolidated Financial Statements warrants, the Company will be required to accelerate the debt discount to the
period in which the exercise or conversion occurs. 4. Discontinued Operations On July 15, 2003, the Company sold 100% of the shares of the Companys three
subsidiaries and selected assets associated with the management of the centers
located in the Canadian Province of Quebec, to Forget & Sauve,
Audioprothesistes, S.E.N.C. (Forget & Sauve) and 6068065 Canada Inc.,
private entities owned and controlled by Steve Forget, a former Helix officer
and director. Mr. Forget served as an officer of HearUSA until October 2002
and as a director until May 2003. The sale agreement provided for total
payments to the Company of approximately $1.7 million, which included in part
payment of pre-existing debt, owed the Company by Forget & Sauve of
approximately $1.6 million. The Company received an initial cash payment of
$700,000 at closing and $1 million over the five following months, including an
amount of approximately $103,000 received in January 2004. The three Quebec subsidiaries and selected assets have been presented as a
discontinued operation and the consolidated financial statements have been
reclassified to segregate the assets, liabilities and operating results of
these subsidiaries for all periods presented. The sale resulted in a loss on
disposal of approximately $105,000 recorded in the second quarter of 2003. Net
revenues of the discontinued operations for the quarter ended March 29, 2003
were approximately $1,168,000 and pre-tax net income of the discontinued
operations was $43,478. 5. 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 3/27/04
    
    $
    16,667,000
    
    
    $
    12,000
    
    
    $
    256,000
    
    
    
    
    
    
    $
    16,935,0003 months ended 3/29/03
    
    
    17,124,000
    
    
    
    19,000
    
    
    
    269,000
    
    
    
    
    
    
    
    17,412,000Income (loss) from operations3 months ended 3/27/04
    
    
    2,169,000
    
    
    
    (5,000
    )
    
    
    122,000
    
    
    
    (2,555,000
    )
    
    
    (269,000
    )3 months ended 3/29/03
    
    
    3,875,000
    
    
    
    (14,000
    )
    
    
    130,000
    
    
    
    (3,166,000
    )
    
    
    825,0003 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
    
    
    
    101,0003 months ended 3/29/03Depreciation and
amortization
    
    
    428,000
    
    
    
    
    
    
    
    1,000
    
    
    
    480,000
    
    
    
    909,000Identifiable assets
    
    
    49,728,000
    
    
    
    
    
    
    
    1,232,000
    
    
    
    15,223,000
    
    
    
    66,183,000Capital expenditures
    
    
    95,000
    
    
    
    
    
    
    
    
    
    
    
    11,000
    
    
    
    106,000
 Incomes (losses) from operations at the segment level are computed before
general and administrative expenses. 9




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##### 



HearUSA,
Inc.
Notes to Consolidated Financial Statements Information in U.S. Dollars concerning geographic areas as of and for the quarters ended March
27, 2004 and March 29, 2003 are as follows: United States
    
    Canada
    
    United States
    
    Canada2004
    
    2004
    
    2003
    
    2003$
    
    $
    
    $
    
    $Net revenues
    
    
    15,442,000
    
    
    
    1,493,000
    
    
    
    16,356,000
    
    
    
    1,056,000Long-lived assets
    
    
    39,945,000
    
    
    
    9,319,000
    
    
    
    41,361,000
    
    
    
    8,408,000
 Net revenues by geographic area are allocated based on the location of the
subsidiary operations. 6. Recent Accounting Pronouncements Effective July 1, 2003, the Company adopted EITF Issue No. 00-21 (EITF
00-21), Accounting For Revenue Arrangements with Multiple Deliverables,
which establishes criteria for whether revenue on a deliverable can be
recognized separately from other deliverables in a multiple deliverable
arrangement. The criteria considers whether the delivered item has stand-alone
value to the customer, whether the fair value of each of the deliverable items
can be reliably determined and the customers right of return for the delivered
items. The Companys adoption of EITF 00-21 did not have an effect on its
consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. It is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. This Statement did not have a material effect on the
Companys consolidated results of operations or financial position. 7. Liquidity Working capital decreased $1.5 million to a working capital deficit of $3.8
million as of March 27, 2004 from a working capital deficit of $2.3 million as
of December 27, 2003. The working capital deficit of $3.8 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 2004, the Company incurred losses
from operations of approximately $269,000 compared to income generated from
operations of $825,000 in 2003. Cash and cash equivalents as of March 27, 2004
was approximately $2.6 million. The Company believes that the shortfall in revenues in the first quarter of
2004 was not lost revenues but delayed revenues attributable to delays in the
Companys contract with the Department of Veteran Affairs and managed care
contracts and related promotions. The Company expects such revenues to occur
in the remainder of 2004. The Company believes that current cash and cash
equivalents and expected cash flow from operations will be sufficient to support the
Companys operational needs through the next twelve months. There can be no
assurance, however, that the Company will achieve its expected cash from
operations or that net revenue levels will increase above the current level and
that unexpected cash needs will not arise 10




---



##### 



HearUSA,
Inc.
Notes to Consolidated Financial Statements for which the cash, cash equivalents and cash flow from operations will be
sufficient. In the event of a shortfall in cash, the Company would 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. 11




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations GENERAL In the first quarter of 2004, the Company generated a net of loss of
approximately $1.6 million, compared to a net income of approximately $201,000
in 2003. The first quarter of 2004 loss includes a non-cash interest expense
of approximately $532,000 representing the amortization of the debt discount
related to the $7.5 million convertible subordinated notes financing completed
in December 2003. RESULTS OF OPERATIONS For the three months ended March 27, 2004 compared to the three months
ended March 29, 2003 Net revenues in the first quarter of 2004 decreased approximately $477,000, or
2.7%, compared to the first quarter in 2003. This decrease was net of an
increase of approximately $190,000 related to a favorable change in the average
Canadian exchange rate from 2003 to 2004. The gross decrease of approximately
$667,000 is mainly due to a decrease of approximately 8.8% in hearing aids sold
during the quarter representing approximately $1.4 million in decreased
revenues, offset by an increase in the average selling price of approximately
5.2% representing approximately a $720,000 increase in revenues. Unlike the
first quarter of 2003, the first quarter of 2004 did not benefit from an
aggregate of approximately $1.5 million in revenues from income of a
special contract and an excess of undelivered
hearing aids from the prior quarter. As
of March 27, 2004, the cumulative amount of preferred pricing reductions
received from Siemens is approximately $6,751,000, reducing the original debt
(Tranches A, B and C) from approximately $14,104,000 to $ 7,353,000. Cost of products sold in the first quarter of 2004 increased approximately
$174,000, or 3.6%, compared to the first quarter in 2003. Included in the cost
of products sold are preferred pricing reductions of approximately $938,000 and
$1,006,000 for the first quarter 2004 and the first quarter 2003. Such pricing
reductions from Siemens are accounted for as reductions of cost of products
sold for financial reporting purposes and applied, pursuant to the credit
agreement, against the principal and interest payments due on Tranches A, B and
C. The cost of products sold as a percent of net revenues was 29.5% and 27.7%
for the first quarter 2004 and the first quarter 2003, respectively. The
increase in cost of products sold, in dollars and as a percent of net revenues
is attributable to increases in prices from our vendors and a change in the mix
of products sold. The increase, as a percent of net revenues, was partially
offset by an increase in average selling price mentioned. Center operating expenses increased approximately $727,000, or 8.6%, in the
first quarter of 2004 compared to the first quarter of 2003. This increase is
mainly attributable to an increase in compensation and marketing in 2004
compared to 2003 of approximately $350,000 and $300,000, respectively. The
increase in compensation is attributable in part to annual increases to
employees at the center level and in part to commissions and bonuses. The
increase in commissions and bonuses is due to changes to some of the
compensation programs during the second quarter of 2003 and the increases in
the number of centers achieving their revenue goal in the first quarter of 2004
compared to the first quarter of 2003. The increase in marketing is
attributable to increase in the frequency in the Companys advertising to the
private pay sector compared to the first quarter of the prior year. General and administrative expenses for the quarter remained constant as
compared to the year ago period at approximately $2.4 million. Depreciation and amortization expense decreased $294,000 or 32.3% in 2003. This
decrease is due to certain property and equipment being fully depreciated. Interest expense increased $650,000 or 124% in the first quarter of 2004
compared to the first quarter in 2003, of which approximately $532,000 is
non-cash as explained below. This increase is attributable to
approximately $67,000 in interest on the credit facility with Siemens due to
the issuance of Tranche E in 12




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##### 



March 2003 and approximately $723,000 of interest
(including the non-cash portion) on the $7.5 million financing that was
completed in December 2003. These increases were offset by a decrease of
approximately $140,000 in interest on existing balances due to repayments of
principal during 2003. The non-cash charge of $532,000 included in the interest expense is the
amortization of the debt discount resulting from the intrinsic value of the
beneficial conversion option, and the proceeds allocated to the warrants to
purchase 2,642,750 shares of the Companys common stock based on relative fair
values of the $7.5 million financing in December 2003. This non-cash charge
does not have an impact on the liquidity and working capital of the Company. LIQUIDITY AND CAPITAL RESOURCES The Company has a secured credit facility from Siemens comprised of (a) a
$10,875,000 five-year term loan credit facility (the Tranche A Loan); (b) a
$25,000,000 five-year revolving loan credit facility (the Tranche B Loan); (c)
a $3,000,000 five-year term loan facility (the Tranche C Loan); (d) a
$13,000,000 five-year term loan credit facility (the Tranche D Loan); and (e)a
$3,500,000 five-year term loan (the Tranche E loan). At March 27, 2004,
$5,324,991, $78,000, $1,950,000, $12,090,250 and $2,590,250, respectively,
representing principal on the Tranche A, Tranche B, Tranche C, Tranche D, and
Tranche E Loans, were outstanding. As of March 27, 2004, approximately
$24,905,000 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 prime (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, at a rate of 10% per annum, 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 requirements of hearing aids from Siemens.
During the first quarter of 2004 and 2003, approximately $938,000 and
$1,006,000, of earned preferred pricing reductions, were recorded as a
reduction of cost of products sold, and $208,000 and $281,000 of interest, and
$730,000 and $725,000 of principal, has been repaid 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 end, the
Company must make a payment equal to 20% of Excess Cash Flow (as defined in
the credit agreement) for such fiscal year end. As a result of the December
2003 financing, the Company paid Siemens approximately $1.8 million in January
of 2004, of which approximately $910,000 million was to against Tranche D and
approximately $910,000 to Tranche E, based on approval by Siemens of the
application of these payments. Also, the Company paid an amount of
approximately $314,000 on April 30, 2004 to Siemens representing the payment
equal to 20% of the Companys 2003 Excess Cash Flow. The Siemens credit facility includes certain financial and other covenants of
the Company, which are customary for loans of this size and nature, including
restrictions on the conduct of the Companys business, the occurrence 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 March
27, 2004, the Company was in compliance with those payment provisions. In the
event of 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. 13




---



##### 



As of March 27, 2004, working capital decreased $1.5 million to a working
capital deficit of $3.8 million, from a working capital deficit of $2.3 million
as of December 27, 2003. The working capital deficit of $3.8 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 2004, the Company incurred losses
from operations of approximately $269,000 compared to income generated from
operations of $825,000 in the first quarter of 2003. Cash and cash equivalents
as of March 27, 2004 was approximately $2.6 million. The Company believes that the shortfall in revenues in the first quarter of
2004 was not lost revenues but delayed revenues attributable to delays in the
Companys contract with the Department of Veteran Affairs and managed care
contracts and related promotions. The Company expects such revenues to occur
in the remaining of 2004. The Company believes that current cash and cash
equivalents and expected cash flow from operations will be sufficient to support the
Companys operational needs through the next twelve months. There can be no
assurance, however, that the Company will achieve its expected cash from
operations or that net revenue levels will increase above the current level and
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 would 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 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 March 27, 2004: Payments due by periodLess
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    13
    
    45
    
    than 5Contractual obligations
    
    Total
    
    year
    
    years
    
    years
    
    yearsLong-term debt (1)
    
    $
    24,474,000
    
    
    $
    4,679,000
    
    
    $
    5,980,000
    
    
    $
    13,815,000
    
    
    $
    Interest to be paid on long-term debt (2)
    
    
    3,863,000
    
    
    
    894,000
    
    
    
    743,000
    
    
    
    2,226,000
    
    
    
    Operating leases
    
    
    15,029,000
    
    
    
    5,487,000
    
    
    
    8,328,000
    
    
    
    1,126,000
    
    
    
    88,000Convertible subordinated notes (3)
    
    
    7,500,000
    
    
    
    
    
    
    
    2,500,000
    
    
    
    5,000,000
    
    
    
    Interest to be paid on convertible
subordinated notes
    
    
    2,391,000
    
    
    
    834,000
    
    
    
    1,237,000
    
    
    
    320,000
    
    
    
    Manditorily redeemable convertible
preferred stock and redemption premiums
(4)
    
    
    4,928,,000
    
    
    
    
    
    
    
    4,928,000
    
    
    
    
    
    
    
    Premiums to be paid on manditorily
redeemable convertible preferred stock
    
    
    1,756,000
    
    
    
    1,004,000
    
    
    
    752,000
    
    
    
    
    
    
    
    Purchase obligations
    
    
    1,735,000
    
    
    
    730,000
    
    
    
    1,005,000
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    61,676,000
    
    
    $
    13,628,000
    
    
    $
    25,473,000
    
    
    $
    22,487,000
    
    
    $
    88,000
  (1)
    
    Approximately $7.4 million (Tranches A, B and C) can be repaid through
preferred pricing reductions from Siemens, including $2.9 million in less
than 1 year, $4.5 million in years 1-3.(2)
    
    Interest on long-term debt excludes $1,314,000 of accrued but unpaid
interest on Tranche D presented with long-term debt on the balance sheet.(3)
    
    These notes and corresponding interest can be repaid at the option of the
Company in common stock at the time payment becomes due.(4)
    
    Includes approximately $265,000 of the 8% premium payable upon redemption
in December 2006, of which $64,000 has been accreted as of March 27, 2004. Net cash provided by operating activities decreased from $1.6 million in the
first quarter of 2003 to net cash used in operating activities of $2.2 million
in the first quarter of 2004. The decrease in net cash
provided by operating activities was primarily the result of a change from a
net income of approximately 14




---



##### 



$350,000 to a net loss of approximately $1.4
million between periods, a net increase in accounts receivable, inventories
and prepaid expenses of approximately $67,000 in 2004, compared to a net
decrease of approximately $1.1 million in 2003, and a net decrease in accounts
payable accrued expenses of approximately $1.4 million in 2004, compared to a
net decrease of approximately $1.8 million in 2003. Net cash used in investing activities increased from approximately $114,000 in
the first quarter of 2003 to net cash provided by investing activities of
$2,243 in the first quarter of 2004 as a result of the collection of
approximately $103,000 related to the discontinued operations. (See Note 4 of
the Consolidated Financial Statements herein.) Net cash provided by financing activities decreased from approximately $2.9
million in the first quarter of 2003 to net cash used by financing activities
of approximately $1.8 million in the first quarter of 2004. This decrease is
primarily the result of the net proceeds of $3,500,000 from the Siemens Tranche
E Loan in 2003, offset by an increase in the payments on long-term debt of $1.6
million in 2004 compared to 2003. This increase is related to the payment of
$1.8 million made to Siemens in January of 2004 on Tranches D and E as
explained in Note 3 of the Consolidated Financial Statements. 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 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 2002 and 2003, 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. Revenue recognition HearUSA recognizes revenues from the sale of audiological products at the time
of delivery and revenues from hearing care services 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 once every three years
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. The Company defers recognition of
capitation revenue until the earlier of the actual utilization by the member
populations of the benefit, or the end of the contract term. When the actual utilization of the benefit by the member population exceeds the
amount received on a per-capita basis (over utilization), the excess is
recorded as accounts receivable on the balance sheet.
Usually, the hearing benefit is structured in a way that the member can use it
only once every three years. 15




---



##### 



In these circumstances, historical data shows
that the benefit will generally be over utilized the first year, appropriately
utilized the second year and under-utilized the third year. The Company
estimates an allowance to reduce the accounts receivable from over-utilization
to a level equivalent to the estimated future under-utilization during the
remaining term of the benefit. 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 estimate the 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 $26,000. 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 if the return is made within 90 days from
the time of delivery to the hearing center. RECENT ACCOUNTING PRONOUNCEMENTS Effective July 1, 2003, the Company adopted EITF Issue No. 00-21 (EITF
00-21), Accounting For Revenue Arrangements with Multiple Deliverables,
which establishes criteria for whether revenue on a deliverable can be
recognized separately from other deliverables in a multiple deliverable
arrangement.
The criteria considers whether the delivered item has stand-alone value to the
customer, whether the fair value of each of the deliverable items can be
reliably determined and the customers right of return for the delivered items.
The Companys adoption of EITF 00-21 did not have an effect on its
consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. It is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. This Statement did not have a material effect on the
Companys consolidated results of operations or financial position. 16




---



##### 



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 Notes Fixed RateVariable RatePrime
    
    Yr 1  2Rate
    
    11%+1%note
    
    Yr 3  5 8%
    
    
    
    
    
    
    
    10%notedue April
    
    due November
    
    10%notes
    
    10%notes
    
    due Dec 1,As of March 27, 2004:
    
    2007
    
    2008
    
    due 2008
    
    due 2007
    
    2006
    
    Other notes
    
    TotalEstimated
cash inflow(outflow)
by fiscalyear
of principalmaturity
    
    $
    
    
    
    $
    
    

    
    $
    
    


    
    $
    
    


    
    $
    
    

    

    $
    
    

    
    $2004
    
    
    (555,000
    )
    
    
    
    
    
    
    (411,000
    )
    
    
    (466,000
    )
    
    
    (1,725,000
    )
    
    
    (603,000
    )
    
    
    (3,760,000
    )2005
    
    
    
    
    
    
    
    
    
    
    (597,000
    )
    
    
    (621,000
    )
    
    
    (2,300,000
    )
    
    
    (418,000
    )
    
    
    (3,936,000
    )2006
    
    
    
    
    
    
    (2,500,000
    )
    
    
    (660,000
    )
    
    
    (621,000
    )
    
    
    (1,300,000
    )
    
    
    (53,000
    )
    
    
    (5,134,000
    )2007
    
    
    (12,849,000
    )
    
    
    (2,500,000
    )
    
    
    (729,000
    )
    
    
    (320,000
    )
    
    
    
    
    
    
    (56,000
    )
    
    
    (16,454,000
    )2008
    
    
    
    
    
    
    (2,500,000
    )
    
    
    (193,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,693,000
    )Total
    
    
    (13,404,000
    )
    
    
    (7,500,000
    )
    
    
    (2,590,000
    )
    
    
    (2,028,000
    )
    
    
    (5,325,000
    )
    
    
    (1,130,000
    )
    
    
    (31,977,000
    )Estimated fair value
    
    
    (13,404,000
    )
    
    
    (7,500,000
    )
    
    
    (2,590,000
    )
    
    
    (2,028,000
    )
    
    
    (5,325,000
    )
    
    
    (1,130,000
    )
    
    
    (31,977,000
    )Carrying Value
    
    
    (13,404,000
    )
    
    
    (7,500,000
    )
    
    
    (2,590,000
    )
    
    
    (2,028,000
    )
    
    
    (5,325,000
    )
    
    
    (1,130,000
    )
    
    
    (31,977,000
    )
 Item 4. Controls and Procedures  a.
    
    As of the end of the period covered by this report, the Company evaluated
the effectiveness of its disclosure controls and procedures. Based upon that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to
be included in its periodic SEC filings.b.
    
    There have been no significant changes in the Companys internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of the evaluation referenced above. 17




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##### 



Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 2.1
    
    The Amended and Restated Merger Agreement, dated November 6, 2001, between HEARx
and Helix Hearing Care of America Corp. (incorporated herein by reference as
Exhibit 2.1 to the Companys Joint Proxy Statement/Prospectus on Form S-4 (Reg. No.
333-73022)).2.2
    
    Interim Order issued by the Superior Court of Quebec and Notice of Application
(incorporated herein by reference as Exhibit 2.2 to the Companys Joint Proxy
Statement/Prospectus Form S-4 (Reg. No. 333-73022)).2.3
    
    Plan of Arrangement, including exchangeable share provisions (incorporated herein
by reference as 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 as 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 as 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 as 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 as 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 as 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 as 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 as 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 as Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed August 28, 2003 (File No. 001-11655)).3.9
    
    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 ending December 27, 2003 (File No. 001-11655)).4.1
    
    Specimen of Certificate representing Common Stock (incorporated herein by reference
as Exhibit 4.1 to the Companys Registration Statement on Form S-18, filed
September 4, 1987 (Registration No. 33-17041-NY)).4.2
    
    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)).4.3
    
    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)).4.4
    
    Form of Warrant to purchase Common Stock issued in connection with March 29, 2002
private placement (incorporated herein by reference as Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the period ended June 28, 2002).
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4.5
    
    Form of Investor Warrant to purchase Common Stock issued in connection with October
1, 2003 private placement (incorporated herein by reference to Exhibit 4.15 to the
Companys Annual Report on Form 10-K for the fiscal year ended December 27, 2003 (File No. 001-11655)).4.6
    
    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).4.7
    
    Form of Five-Year Warrant to purchase Common Stock (incorporated herein by
reference as Exhibit 4.2 to the Companys Current Report on Form 8-K, filed
December 31, 2003).10.1*
    
    Employment Agreement, dated May 12, 2003 with Dr. Paul A. Brown10.2*
    
    Employment Agreement, dated May 12, 2003 with Stephen J. Hansbrough31.1
    
    CEO Certification, pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    CEO and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    *
    
    Indicates a management contract. 19




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, 2004/s/Stephen J. HansbroughStephen J. HansbroughChief Executive OfficerHearUSA, Inc./s/Gino ChouinardGino ChouinardChief Financial OfficerHearUSA, Inc.
 20