##### 



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 July 2, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-11655
 HearUSA, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    22-2748248(State of Other Jurisdiction of
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 þ whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days Yes þ No o
 Indicate by check þ whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
 On July 29, 2005 31,069,351 shares of the Registrants Common Stock and 866,051 exchangeable shares
of HEARx Canada, Inc. were outstanding.




---



##### 



INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets
July 2, 2005 and December 25, 2004
    
    
    3Consolidated Statements of Operations
Six months ended July 2, 2005 and June 26, 2004
    
    
    4Consolidated Statements of Operations
Three months ended July 2, 2005 and June 26, 2004
    
    
    5Consolidated Statements of Cash Flows
Six months ended July 2, 2005 and June 26, 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 6. Exhibits
    
    
    24Signatures
    
    
    26
 2




---



##### 



Part I  Financial Information
 Item 1. Financial Statements
 HearUSA, Inc.
 Consolidated Balance Sheets
 July 2,
    
    
    December 25,2005
    
    
    2004(unaudited)
    
    (audited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,755,332
    
    
    $
    2,615,379Restricted cash and investment securities
    
    
    435,000
    
    
    
    435,000Accounts and notes receivable, less allowance for
doubtful accounts of $358,431 and $373,583
    
    
    5,722,337
    
    
    
    5,876,699Inventories
    
    
    713,337
    
    
    
    877,206Prepaid expenses and other
    
    
    1,159,992
    
    
    
    558,921Total current assets
    
    
    11,785,998
    
    
    
    10,363,205Property and equipment, net
    
    
    3,132,579
    
    
    
    3,346,788Goodwill
    
    
    35,475,029
    
    
    
    33,210,380Intangible assets, net
    
    
    11,444,003
    
    
    
    11,092,594Deposits and other
    
    
    537,852
    
    
    
    549,924Assets of discontinued operations (Note 2)
    
    
    
    
    
    
    738,924$
    62,375,461
    
    
    $
    59,301,815LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    6,441,470
    
    
    $
    6,644,600Accrued expenses
    
    
    2,365,991
    
    
    
    2,303,601Accrued salaries and other compensation
    
    
    2,598,736
    
    
    
    1,982,559Current maturities of long-term debt
    
    
    4,784,219
    
    
    
    4,152,908Dividends payable
    
    
    73,600
    
    
    
    177,996Total current liabilities
    
    
    16,264,016
    
    
    
    15,261,664Long-term debt, less current maturities
    
    
    16,924,238
    
    
    
    17,296,125Convertible subordinated notes, net of debt discount
of $4,414,603 and $5,443,879 (Note 5)
    
    
    3,085,397
    
    
    
    2,056,121Total long-term debt and convertible subordinated notes
    
    
    20,009,635
    
    
    
    19,352,246Commitments and contingencies
    
    
    
    
    
    
    Mandatorily redeemable convertible preferred stock
    
    
    4,766,940
    
    
    
    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
    
    
    
    233Total preferred stock
    
    
    233
    
    
    
    233Common stock: $.10 par; 75,000,000 shares authorized
31,591,760 and 30,060,690 shares issued
    
    
    3,159,176
    
    
    
    3,006,069Stock subscription
    
    
    (412,500
    )
    
    
    (412,500
    )Additional paid-in capital
    
    
    121,786,160
    
    
    
    120,197,937Accumulated deficit
    
    
    (102,259,259
    )
    
    
    (101,968,452
    )Accumulated other comprehensive income
    
    
    1,546,201
    
    
    
    1,639,838Treasury stock, at cost: 523,662 common shares
    
    
    (2,485,141
    )
    
    
    (2,485,141
    )Total stockholders equity
    
    
    21,334,870
    
    
    
    19,977,984$
    62,375,461
    
    
    $
    59,301,815
 See accompanying notes to the consolidated financial statements
 3




---



##### 



HearUSA, Inc.
 Consolidated Statements of Operations
Six Months Ended July 2, 2005 and June 26, 2004
 Six Months EndedJuly 2,
    
    
    June 26,2005
    
    
    2004(unaudited)
    
    (unaudited)Net revenuesHearing aids and other products
    
    $
    35,371,022
    
    
    $
    30,701,917Services
    
    
    2,718,853
    
    
    
    2,537,313Total net revenues
    
    
    38,089,875
    
    
    
    33,239,230Operating costs and expensesHearing aids and other products
    
    
    9,968,892
    
    
    
    8,370,735Services
    
    
    935,949
    
    
    
    1,003,714Total cost of products sold and services
    
    
    10,904,842
    
    
    
    9,374,449Center operating expenses
    
    
    18,032,934
    
    
    
    17,544,501General and administrative expenses
    
    
    5,966,285
    
    
    
    4,948,825Depreciation and amortization
    
    
    973,181
    
    
    
    1,073,813Total operating costs and expenses
    
    
    35,877,242
    
    
    
    32,941,588Income from operations
    
    
    2,212,633
    
    
    
    297,642Non-operating income (expense):Gain from insurance proceeds
    
    
    129,596
    
    
    
    Interest income
    
    
    28,829
    
    
    
    7,444Interest expense (including approximately
$1,096,000 and $1,064,000 of non-cash debt discount
amortization)
    
    
    (2,360,179
    )
    
    
    (2,329,031
    )Net income (loss) from continuing operations
    
    
    10,879
    
    
    
    (2,023,945
    )Discontinued operations (Note 2):Gain on disposition of assets
    
    
    365,158
    
    
    
    Income (loss) from discontinued operations
    
    
    (299,767
    )
    
    
    (186,347
    )Net income (loss) from discontinued operations
    
    
    65,391
    
    
    
    (186,347
    )Net income (loss)
    
    
    76,270
    
    
    
    (2,210,292
    )Dividends on preferred stock
    
    
    (367,077
    )
    
    
    (353,497
    )Net loss applicable to common stockholders
    
    $
    (290,807
    )
    
    $
    (2,563,789
    )Net loss from continuing operations, including
dividends on preferred stock, applicable to common
stockholders  basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.08
    )Net loss applicable to common stockholders per
common share  basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.08
    )Weighted average number of shares of common stock
outstanding  basic
    
    
    31,199,595
    
    
    
    30,423,755Weighted average number of shares of common stock
outstanding  diluted
    
    
    31,199,595
    
    
    
    30,423,755
 See accompanying notes to the consolidated financial statements
 4




---



##### 



HearUSA, Inc.
 Consolidated Statements of Operations
Three Months Ended July 2, 2005 and June 26, 2004
 Three Months EndedJuly 2,
    
    
    June 26,2005
    
    
    2004(unaudited)
    
    (unaudited)Net revenuesHearing aids and other products
    
    $
    17,778,788
    
    
    $
    15,877,986Services
    
    
    1,279,672
    
    
    
    1,312,937Total net revenues
    
    
    19,058,460
    
    
    
    17,190,923Operating costs and expensesHearing aids and other products
    
    
    5,101,956
    
    
    
    4,239,753Services
    
    
    437,292
    
    
    
    450,403Total cost of products sold and services
    
    
    5,539,248
    
    
    
    4,690,156Center operating expenses
    
    
    8,829,042
    
    
    
    9,012,295General and administrative expenses
    
    
    3,002,401
    
    
    
    2,493,576Depreciation and amortization
    
    
    492,657
    
    
    
    519,190Total operating costs and expenses
    
    
    17,863,348
    
    
    
    16,715,217Income from operations
    
    
    1,195,112
    
    
    
    475,706Non-operating income (expense):Gain from insurance proceeds
    
    
    129,596
    
    
    
    Interest income
    
    
    17,145
    
    
    
    3,587Interest expense (including approximately $528,000
and $532,000 of non-cash debt discount
amortization)
    
    
    (1,177,566
    )
    
    
    (1,155,758
    )Net income (loss) from continuing operations
    
    
    164,287
    
    
    
    (676,465
    )Discontinued operations (Note 2):Gain on disposition of assets
    
    
    365,158
    
    
    
    Income (loss) from discontinued operations
    
    
    (201,922
    )
    
    
    (95,765
    )Net income (loss) from discontinued operations
    
    
    163,236
    
    
    
    (95,765
    )Net income (loss)
    
    
    327,523
    
    
    
    (772,230
    )Dividends on preferred stock
    
    
    (173,447
    )
    
    
    (175,778
    )Net income (loss) applicable to common stockholders
    
    $
    154,076
    
    
    $
    (948,008
    )Net loss from continuing operations, including
dividends on preferred stock, applicable to common
stockholders  basic and diluted
    
    $
    (0.00
    )
    
    $
    (0.03
    )Net income (loss) applicable to common stockholders
per common share  basic and diluted
    
    $
    0.00
    
    
    $
    (0.03
    )Weighted average number of shares of common stock
outstanding  basic
    
    
    31,933,380
    
    
    
    30,423,705Weighted average number of shares of common stock
outstanding  diluted
    
    
    42,318,950
    
    
    
    30,423,705
 See accompanying notes to the consolidated financial statements
 5




---



##### 



HearUSA, Inc.
 Consolidated Statements of Cash Flows
Six Months Ended July 2, 2005 and June 26, 2004
 July 2,
    
    
    June 26,2005
    
    
    2004(unaudited)
    
    (unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    76,270
    
    
    $
    (2,210,292
    )Net income (loss) from discontinued operations
    
    
    65,391
    
    
    
    (186,347
    )Income (loss) from continuing operations
    
    
    10,879
    
    
    
    (2,023,945
    )Adjustments to reconcile net gain (loss) to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    973,181
    
    
    
    1,073,813Provision for doubtful accounts
    
    
    186,684
    
    
    
    197,504Debt discount amortization
    
    
    1,095,860
    
    
    
    1,063,533Principal payments on long-term debt made through
preferred pricing reductions
    
    
    (1,462,133
    )
    
    
    (1,460,402
    )Interest on Siemens Tranche D
    
    
    478,088
    
    
    
    311,366Equipment purchases through vendor credit
    
    
    
    
    
    
    (158,800
    )Other
    
    
    (46,942
    )
    
    
    21,794(Increase) decrease in:Accounts and notes receivable
    
    
    275,117
    
    
    
    (799,958
    )Inventories
    
    
    9,552
    
    
    
    61,295Prepaid expenses and other
    
    
    (570,739
    )
    
    
    557,071Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (200,755
    )
    
    
    (667,571
    )Accrued salaries and other compensation
    
    
    618,293
    
    
    
    228,010Net cash provided by (used in) operating activities
    
    
    1,367,085
    
    
    
    (1,596,290
    )Net cash (used in) discontinued operations
    
    
    (186,792
    )
    
    
    (68,592
    )Net cash provided by (used in) operating activities
    
    
    1,180,293
    
    
    
    (1,664,882
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (393,240
    )
    
    
    (152,940
    )Business acquisitions
    
    
    (976,922
    )
    
    
    Proceeds from sales of discontinued operations
    
    
    785,715
    
    
    
    101,746Net cash used in investing activities
    
    
    (584,447
    )
    
    
    (51,194
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    
    
    
    
    500,000Principal payments on long-term debt
    
    
    (739,221
    )
    
    
    (2,632,182
    )Proceeds from the exercise of warrants
    
    
    1,725,000
    
    
    
    Proceeds from Board of Director sale of stock
    
    
    
    
    
    
    4,189Proceeds from exercise of employee stock options
    
    
    2,846
    
    
    
    Dividends on preferred stock
    
    
    (414,455
    )
    
    
    (673,007
    )Net cash provided by (used in) financing activities
    
    
    574,170
    
    
    
    (2,801,000
    )Effects of exchange rate changes
    
    
    (30,063
    )
    
    
    9,995Net increase (decrease) in cash and cash equivalents
    
    
    1,139,953
    
    
    
    (4,507,081
    )Cash and cash equivalents at beginning of period
    
    
    2,615,379
    
    
    
    6,714,881Cash and cash equivalents at end of period
    
    $
    3,755,332
    
    
    $
    2,207,800
 Supplemental disclosure of cash flow information:
    
    (unaudited)
    
    
    (unaudited)Cash paid for interest
    
    $
    581,996
    
    
    $
    666,753Supplemental schedule of non-cash investing and financing activities:Principal payments on long-term debt made through preferred pricing reductions
    
    $
    1,462,133
    
    
    $
    1,460,402
 See accompanying notes to consolidated financial statements
 6




---



##### 



HearUSA, Inc.
 Notes to Consolidated Financial Statements
  1. Description of the Company and Summary of Significant Accounting Policies
 The Company
  Basis of consolidation
  Fiscal year
  Net income (loss) applicable to common stockholders per common share
  7




---



##### 



HearUSA, Inc.
 Notes to Consolidated Financial Statements
  Comprehensive income
   Six Months Ended
    
    
    Three Months EndedJuly 2, 2005
    
    
    June 26, 2004
    
    
    July 2, 2005
    
    
    June 26, 2004Net income (loss) for the period
    
    $
    76,270
    
    
    $
    (2,210,382
    )
    
    $
    327,523
    
    
    $
    (772,230
    )Other comprehensive income:Foreign currency translation
adjustments
    
    
    (93,637
    )
    
    
    (302,629
    )
    
    
    (296,971
    )
    
    
    (232,146
    )Comprehensive income (loss) for
the period
    
    $
    (17,367
    )
    
    $
    (2,513,011
    )
    
    $
    30,552
    
    
    $
    (1,004,376
    )
 8




---



##### 



HearUSA, Inc.
 Notes to Consolidated Financial Statements
 Stock-based compensation
  Six Months Ended
    
    
    Three Months EndedJuly 2,
    
    
    June 26,
    
    
    July 2,
    
    
    June 26,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss) applicable
to common stockholders as
reported
    
    $
    (290,807
    )
    
    $
    (2,563,789
    )
    
    $
    154,076
    
    
    $
    (948,008
    )Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of tax
effects
    
    
    (747,000
    )
    
    
    (186,000
    )
    
    
    (390,000
    )
    
    
    (93,000
    )Pro forma, net loss
    
    $
    (1,037,807
    )
    
    $
    (2,749,789
    )
    
    $
    (235,924
    )
    
    $
    (1,041,008
    )Net income
(loss) per shareBasic-as reported
    
    $
    (0.01
    )
    
    $
    (0.08
    )
    
    $
    0.00
    
    
    $
    (0.03
    )Basic-pro forma
    
    $
    (0.03
    )
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )Diluted-as reported
    
    $
    (0.01
    )
    
    $
    (0.08
    )
    
    $
    0.00
    
    
    $
    (0.03
    )Diluted-pro forma
    
    $
    (0.03
    )
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
  Reclassifications
  2. Discontinued operations
   9




---



##### 



HearUSA, Inc.
 Notes to Consolidated Financial Statements
  3. Business Acquisitions
   4. Stockholders Equity
 Common stock
  5. Convertible Subordinated Notes
   10




---



##### 



HearUSA, Inc.
 Notes to Consolidated Financial Statements
    6. Segments
  Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalHearing aids and other products revenues6 months ended 7/2/05
    
    $
    35,309,000
    
    
    $
    62,000
    
    
    
    
    
    
    
    
    
    
    $
    35,371,0006 months ended 6/26/04
    
    $
    30,671,000
    
    
    $
    31,000
    
    
    
    
    
    
    
    
    
    
    $
    30,702,000Services revenues6 months ended 7/2/05
    
    
    2,054,000
    
    
    
    
    
    
    
    665,000
    
    
    
    
    
    
    
    2,719,0006 months ended 6/26/04
    
    
    2,059,000
    
    
    
    
    
    
    
    478,000
    
    
    
    
    
    
    
    2,537,000Income (loss) from operations6 month ended 7/2/05
    
    
    7,994,000
    
    
    
    (11,000
    )
    
    
    300,000
    
    
    
    (6,070,000
    )
    
    
    2,213,0006 month ended 6/26/04
    
    
    5,258,000
    
    
    
    (8,000
    )
    
    
    159,000
    
    
    
    (5,111,000
    )
    
    
    298,0006 months ended 7/2/05Depreciation and
amortization
    
    
    866,000
    
    
    
    
    
    
    
    3,000
    
    
    
    104,000
    
    
    
    973,000Identifiable assets
    
    
    48,913,000
    
    
    
    
    
    
    
    1,273,000
    
    
    
    12,189,000
    
    
    
    62,375,000Capital expenditures
    
    
    318,000
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    393,0006 months ended 6/26/04Depreciation and
amortization
    
    
    910,000
    
    
    
    
    
    
    
    2,000
    
    
    
    162,000
    
    
    
    1,074,000Identifiable assets
    
    
    47,309,000
    
    
    
    
    
    
    
    1,111,000
    
    
    
    11,395,000
    
    
    
    59,815,000Capital expenditures
    
    
    128,000
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    153,000
 11




---



##### 



HearUSA, Inc.
 Notes to Consolidated Financial Statements
    As of July 2, 2005
    
    
    As of June 26, 2004United States
    
    
    Canada
    
    
    United States
    
    
    Canada$
    
    
    $
    
    
    $
    
    
    $Hearing aid and
other product
revenues
    
    
    31,534,000
    
    
    
    3,837,000
    
    
    
    27,709,000
    
    
    
    2,993,000Service revenues
    
    
    2,512,000
    
    
    
    207,000
    
    
    
    2,393,000
    
    
    
    144,000Long-lived assets
    
    
    41,028,000
    
    
    
    9,561,000
    
    
    
    39,649,000
    
    
    
    9,012,000Net assets
    
    
    50,204,000
    
    
    
    12,171,000
    
    
    
    49,349,000
    
    
    
    10,466,000
  7. Recent Accounting Pronouncements
  8. Liquidity
   12




---



##### 



HearUSA, Inc.
 Notes to Consolidated Financial Statements
  13




---



##### 



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. 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. 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. 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.
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 GENERAL
   RESULTS OF OPERATIONS
 For the three months ended July 2, 2005 compared to the three months ended June 26, 2004
   14




---



##### 



15




---



##### 



For the six months ended July 2, 2005 compared to the six months ended June 26, 2004
       16




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
   17




---



##### 



18




---



##### 



Payments due by periodLess
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsLong-term debt (1)
    
    $
    21,710,000
    
    
    $
    4,082,000
    
    
    $
    17,000,000
    
    
    $
    628,000
    
    
    $
    Interest to be paid on long-term debt (2)
    
    
    818,000
    
    
    
    328,000
    
    
    
    472,000
    
    
    
    18,000
    
    
    
    Operating leases
    
    
    12,619,000
    
    
    
    4,840,000
    
    
    
    6,887,000
    
    
    
    892,000
    
    
    
    Convertible subordinated notes (3)
    
    
    7,500,000
    
    
    
    
    
    
    
    5,000,000
    
    
    
    2,500,000
    
    
    
    Interest to be paid on convertible
subordinated notes
    
    
    1,332,000
    
    
    
    405,000
    
    
    
    927,000
    
    
    
    
    
    
    
    Mandatorily redeemable convertible
preferred stock and redemption premiums
(4)
    
    
    4,928,000
    
    
    
    
    
    
    
    4,928,000
    
    
    
    
    
    
    
    Dividends to be paid on mandatorily
redeemable convertible preferred stock
    
    
    709,000
    
    
    
    228,000
    
    
    
    481,000
    
    
    
    
    
    
    
    Employment agreements
    
    
    1,894,000
    
    
    
    402,000
    
    
    
    1,492,000Purchase obligations
    
    
    2,060,000
    
    
    
    357,000
    
    
    
    1,703,000
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    53,570,000
    
    
    $
    10,642,000
    
    
    $
    38,890,000
    
    
    $
    4,038,000
    
    
    $
    
 (1)
    
    Approximately $3.7 million (Tranches A, B and C) can be repaid through preferred pricing
reductions from Siemens, including $2.9 million in less than 1 year and, $779,000 in years
1-3.(2)
    
    Interest on long-term debt excludes $2,292,000 of accrued but unpaid interest on Tranche D
presented with long-term debt in (1) above. In addition, approximately $305,000 of interest
on Tranches A, B, and 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 $204,000 has been accreted as of July 2, 2005.
    19




---



##### 



CRITICAL ACCOUNTING POLICIES
  Goodwill
  Revenue recognition
   Allowance for doubtful accounts
  20




---



##### 



Sales returns
  RECENT ACCOUNTING PRONOUNCEMENTS
  21




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Variable Rate
    
    
    Fixed RatePrime Rate
    
    
    Yr 1  11%+ 1% note
    
    
    Yr 3  8%
    
    
    
    
    
    
    
    
    
    
    10 % noteduedue April
    
    
    November
    
    
    10 % notes
    
    
    10 % notes
    
    
    due Dec 1,As of July 2, 2005:
    
    2007
    
    
    2008
    
    
    due 2008
    
    
    due 2007
    
    
    2006
    
    
    Other notes
    
    
    TotalEstimated cash
inflow (outflow) by
fiscal year of
principal maturity
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $2005
    
    
    (365,000
    )
    
    
    
    
    
    
    (256,000
    )
    
    
    (310,000
    )
    
    
    (1,150,000
    )
    
    
    (540,000
    )
    
    
    (2,621,000
    )2006
    
    
    
    
    
    
    (2,500,000
    )
    
    
    (657,000
    )
    
    
    (621,000
    )
    
    
    (1,300,000
    )
    
    
    (670,000
    )
    
    
    (5,748,000
    )2007
    
    
    (13,526,000
    )
    
    
    (2,500,000
    )
    
    
    (726,000
    )
    
    
    (320,000
    )
    
    
    
    
    
    
    (672,000
    )
    
    
    (17,744,000
    )2008
    
    
    
    
    
    
    (2,500,000
    )
    
    
    (193,000
    )
    
    
    
    
    
    
    
    
    
    
    (306,000
    )
    
    
    (2,999,000
    )2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (98,000
    )
    
    
    (98,000
    )Total
    
    
    (13,891,000
    )
    
    
    (7,500,000
    )
    
    
    (1,832,000
    )
    
    
    (1,250,000
    )
    
    
    (2,450,000
    )
    
    
    (2,286,000
    )
    
    
    (29,210,000
    )Estimated fair value
    
    
    (13,891,000
    )
    
    
    (7,500,000
    )
    
    
    (1,832,000
    )
    
    
    (1,250,000
    )
    
    
    (2,450,000
    )
    
    
    (2,286,000
    )
    
    
    (29,210,000
    )Carrying Value
    
    
    (13,891,000
    )
    
    
    (7,500,000
    )
    
    
    (1,832,000
    )
    
    
    (1,250,000
    )
    
    
    (2,450,000
    )
    
    
    (2,286,000
    )
    
    
    (29,210,000
    )
 Item 4. Controls and Procedures
   22




---



##### 



Part II Other Information
 Item 4. Submission of Matters to a Vote of Security Holders
   Against/Nominee
    
    For
    
    
    WithheldPaul A. Brown, M. D.
    
    
    26,549,441
    
    
    
    4,265,461Stephen J. Hansbrough
    
    
    26,557,809
    
    
    
    4,257,093Thomas W. Archibald
    
    
    26,557,656
    
    
    
    4,257,246David J. McLachlan
    
    
    26,500,688
    
    
    
    4,314,214Joseph L. Gitterman III
    
    
    26,561,969
    
    
    
    4,252,933Michel Labadie
    
    
    26,562,203
    
    
    
    4,252,699
 23




---



##### 



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 herein 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 Computer Share 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)).10.1
    
    Asset Purchase Agreement dated June 16, 2005 between HearUSA, Inc and Sonus-USA,
Inc.
 24




---



##### 



23
    
    Consent of the Independent Public Accountants (incorporated by reference to Exhibit
23 to the Companys Form 10-K for the period, filed March 29, 2005)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
 25




---



##### 



SIGNATURES
  HearUSA Inc.(Registrant)
  /s/Stephen J. HansbroughStephen J. HansbroughChief Executive OfficerHearUSA, Inc./s/Gino ChouinardGino ChouinardChief Financial OfficerHearUSA, Inc.
 26