##### 



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 October 1, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-11655
 HearUSA, Inc.
 
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    22-2748248(State of Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)1250 Northpoint Parkway, West Palm Beach, Florida
    
    33407(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants
Telephone Number, Including Area Code (561) 478-8770
 
 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
 Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No o
 On October 28, 2005, 31,218,851 shares of the Registrants Common Stock and 841,051 exchangeable
shares of HEARx Canada, Inc. were outstanding.




---



##### 



INDEX
 PagePART I.
    
    
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance SheetsOctober 1, 2005 and December 25, 2004
    
    3Consolidated Statements of OperationsNine months ended October 1, 2005 and September 25, 2004
    
    4Consolidated Statements of OperationsThree months ended October 1, 2005 and September 25, 2004
    
    5Consolidated Statements of Cash FlowsNine months ended October 1, 2005 and September 25, 2004
    
    6Notes to Consolidated Financial Statements
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    24Item 4.
    
    Controls and Procedures
    
    24PART II.
    
    
    
    OTHER INFORMATIONItem 6.
    
    Exhibits
    
    25Signatures
    
    26
 2




---



##### 



Part
I  Financial Information
 Item 1. Financial Statements
 HearUSA, Inc.
Consolidated Balance Sheets
 October 1,
    
    
    December 25,2005
    
    
    2004(unaudited)
    
    
    (audited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,152,769
    
    
    $
    2,615,379Restricted cash and investment securities
    
    
    431,000
    
    
    
    435,000Accounts and notes receivable, less allowance for
doubtful accounts of $381,528 and $373,583
    
    
    6,620,397
    
    
    
    5,876,699Inventories
    
    
    904,785
    
    
    
    801,234Prepaid expenses and other
    
    
    1,409,031
    
    
    
    557,435Current
assets held for sale (Note 2)
    
    
    
    
    
    
    77,458Total current assets
    
    
    12,517,982
    
    
    
    10,363,205Property and equipment, net
    
    
    3,312,972
    
    
    
    3,346,788Goodwill
(Note 3)
    
    
    36,282,984
    
    
    
    33,210,380Intangible assets, net
    
    
    11,492,728
    
    
    
    11,094,169Deposits and other
    
    
    617,389
    
    
    
    551,148Long-term
assets held for sale (Note 2)
    
    
    
    
    
    
    736,125$
    64,224,055
    
    
    $
    59,301,815LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    7,546,049
    
    
    $
    6,644,600Accrued expenses
    
    
    2,129,025
    
    
    
    2,303,601Accrued salaries and other compensation
    
    
    2,189,945
    
    
    
    1,982,559Current maturities of long-term debt
    
    
    4,664,454
    
    
    
    4,152,908Dividends payable
    
    
    34,561
    
    
    
    177,996Current maturities of subordinated notes
    
    
    1,760,000
    
    
    
    Current maturities of convertible subordinated notes
    
    
    1,875,000
    
    
    
    Total current liabilities
    
    
    20,199,034
    
    
    
    15,261,664Long-term debt
    
    
    16,335,592
    
    
    
    17,296,125Subordinated
notes, net of debt discount of $1,662,799 (Note 7)
    
    
    2,077,201
    
    
    
    Warrant
liability (Note 7)
    
    
    1,794,702
    
    
    
    Convertible subordinated notes, net of debt discount of $3,919,759
and $5,443,879 (Note 5)
    
    
    1,705,241
    
    
    
    2,056,121Total long-term debt, subordinated notes, warrant liability and
convertible subordinated notes
    
    
    21,912,736
    
    
    
    19,352,246Commitments and contingencies
    
    
    
    
    
    
    Mandatorily
redeemable convertible preferred stock (Series E) (Note 6)
    
    
    
    
    
    
    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
31,742,510 and 30,060,690 shares issued
    
    
    3,174,251
    
    
    
    3,006,069Stock subscription
    
    
    (412,500
    )
    
    
    (412,500
    )Additional paid-in capital
    
    
    121,908,793
    
    
    
    120,197,937Accumulated deficit
    
    
    (102,344,377
    )
    
    
    (101,968,452
    )Accumulated other comprehensive income
    
    
    2,271,026
    
    
    
    1,639,838Treasury stock, at cost: 523,662 and 523,662 common shares
    
    
    (2,485,141
    )
    
    
    (2,485,141
    )Total stockholders equity
    
    
    22,112,285
    
    
    
    19,977,984$
    64,224,055
    
    
    $
    59,301,815
 See accompanying notes to the consolidated financial statements
 3




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Nine Months Ended October 1, 2005 and September 25, 2004
 October 1,
    
    
    September 25,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Net revenuesHearing aids and other products
    
    $
    53,706,549
    
    
    $
    46,617,220Services
    
    
    3,995,852
    
    
    
    4,157,405Total net revenues
    
    
    57,702,401
    
    
    
    50,774,625Operating costs and expensesHearing aids and other products
    
    
    15,692,130
    
    
    
    12,835,926Services
    
    
    1,342,226
    
    
    
    1,305,112Total cost of products sold and services
    
    
    17,034,356
    
    
    
    14,141,038Clinic operating expenses
    
    
    26,929,214
    
    
    
    26,005,198General and administrative expenses
    
    
    8,848,091
    
    
    
    7,534,233Depreciation and amortization
    
    
    1,446,203
    
    
    
    1,578,190Total operating costs and expenses
    
    
    54,257,864
    
    
    
    49,258,659Income from operations
    
    
    3,444,537
    
    
    
    1,515,966Non-operating income (expense):Gain from insurance proceeds
    
    
    430,122
    
    
    
    Interest income
    
    
    52,180
    
    
    
    11,045Interest expense (including approximately $1,759,000 and $1,595,000
of non-cash debt discount amortization) (Notes 5 and 7)
    
    
    (3,595,147
    )
    
    
    (3,467,304
    )Income (loss) from continuing operations
    
    
    331,692
    
    
    
    (1,940,293
    )Discontinued operations (Note 2):Gain on disposition of assets
    
    
    365,158
    
    
    
    Loss from discontinued operations
    
    
    (406,662
    )
    
    
    (326,169
    )Net loss from discontinued operations
    
    
    (41,504
    )
    
    
    (326,169
    )Net income (loss)
    
    
    290,188
    
    
    
    (2,266,462
    )Dividends on preferred stock (Note 6)
    
    
    (666,113
    )
    
    
    (530,828
    )Net loss applicable to common stockholders
    
    $
    (375,925
    )
    
    $
    (2,797,290
    )Net loss from continuing operations, including dividends on preferred
stock, per common share  basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.08
    )Net loss applicable to common stockholders per common share  basic
and diluted
    
    $
    (0.01
    )
    
    $
    (0.09
    )Weighted average number of shares of common stock outstanding  basic
and diluted
    
    
    31,452,690
    
    
    
    30,425,804
 See accompanying notes to the consolidated financial statements
 4




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended October 1, 2005 and September 25, 2004
 October 1,
    
    
    September 25,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Net revenuesHearing aids and other products
    
    $
    18,362,752
    
    
    $
    15,911,778Services
    
    
    1,252,803
    
    
    
    1,623,617Total net revenues
    
    
    19,615,555
    
    
    
    17,535,395Operating costs and expensesHearing aids and other products
    
    
    5,624,739
    
    
    
    4,345,713Services
    
    
    507,152
    
    
    
    420,804Total cost of products sold and services
    
    
    6,131,891
    
    
    
    4,766,517Clinic
operating expenses
    
    
    8,868,510
    
    
    
    8,460,660General and administrative expenses
    
    
    2,882,357
    
    
    
    2,585,408Depreciation and amortization
    
    
    471,116
    
    
    
    504,396Total operating costs and expenses
    
    
    18,353,874
    
    
    
    16,316,981Income from operations
    
    
    1,261,681
    
    
    
    1,218,414Non-operating income (expense):Gain from insurance proceeds
    
    
    300,527
    
    
    
    Interest income
    
    
    22,582
    
    
    
    3,601Interest expense (including approximately
$663,000 and $532,000 of non-cash debt
discount amortization) (Notes 5 and 7)
    
    
    (1,234,171
    )
    
    
    (1,138,273
    )Income from continuing operations
    
    
    350,619
    
    
    
    83,742Discontinued operations (Note 2):Net loss from discontinued operations
    
    
    (140,155
    )
    
    
    (139,824
    )Net income (loss)
    
    
    210,464
    
    
    
    (56,082
    )Dividends on preferred stock (Note 6)
    
    
    (299,035
    )
    
    
    (177,331
    )Net loss applicable to common stockholders
    
    $
    (88,571
    )
    
    $
    (233,413
    )Net income (loss) from continuing
operations, including dividends on
preferred stock, per common share  basic
    
    $
    0.00
    
    
    $
    (0.00
    )Net income (loss) from continuing
operations, including dividends on
preferred stock, per common share
 diluted
    
    $
    0.00
    
    
    $
    (0.00
    )Net loss applicable to common
stockholders per common share  basic
    
    $
    (0.00
    )
    
    $
    (0.01
    )Net loss applicable to common
stockholders per common share  diluted
    
    $
    (0.00
    )
    
    $
    (0.01
    )Weighted average number of shares of
common stock outstanding  basic
    
    
    32,033,447
    
    
    
    30,429,902Weighted average number of shares of
common stock outstanding  diluted
    
    
    39,155,406
    
    
    
    30,429,902
 See accompanying notes to the consolidated financial statements
 5




---



##### 



October 1,
    
    
    September 25,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    290,188
    
    
    $
    (2,266,462
    )Adjustments to reconcile net (loss) gain to net cash (used in)
provided by operating activities:Depreciation and amortization
    
    
    1,446,203
    
    
    
    1,578,190Provision for doubtful accounts
    
    
    266,554
    
    
    
    313,443Loss from discontinued operations
    
    
    41,504
    
    
    
    326,169Debt discount amortization
    
    
    1,758,771
    
    
    
    1,595,300Principal payments on long-term debt made through
preferred pricing reductions
    
    
    (2,192,336
    )
    
    
    (2,190,603
    )Interest on Siemens Tranche D
    
    
    632,533
    
    
    
    480,215Other
    
    
    (30,551
    )
    
    
    26,631(Increase) decrease in:Accounts and notes receivable (net of business acquisitions)
    
    
    (904,202
    )
    
    
    (1,202,220
    )Inventories (net of business acquisitions)
    
    
    (186,834
    )
    
    
    54,144Prepaid expenses and other (net of business acquisitions)
    
    
    (490,066
    )
    
    
    760,468Increase (decrease) in:Accounts payable and accrued expenses (net of business
acquisitions)
    
    
    574,679
    
    
    
    (146,816
    )Accrued salaries and other compensation (net of business
acquisitions)
    
    
    196,070
    
    
    
    248,304Net cash provided by (used) in continuing operations
    
    
    1,402,513
    
    
    
    (423,237
    )Net cash used in discontinued operations
    
    
    (301,244
    )
    
    
    (149,758
    )Net cash provided by (used in) operating activities
    
    
    1,101,269
    
    
    
    (572,995
    )Cash flows from investing activitiesPurchase of property and equipment-continuing operations
    
    
    (781,117
    )
    
    
    (308,935
    )Purchase of property and equipment- discontinued operations
    
    
    (13,332
    )
    
    
    (26,521
    )Proceeds from sales of discontinued operations
    
    
    1,101,385
    
    
    
    102,539Business acquisitions
    
    
    (1,282,303
    )
    
    
    Net cash used in investing activities
    
    
    (975,367
    )
    
    
    (232,917
    )Cash flows from financing activitiesNet proceeds from issuance of subordinated and convertible
subordinated notes
    
    
    5,170,000
    
    
    
    500,000Principal payments on long-term debt
    
    
    (1,072,857
    )
    
    
    (2,894,616
    )Proceeds from the exercise of warrants
    
    
    1,725,000
    
    
    
    Cost of exchange and redemption of capital stock
    
    
    (4,928,041
    )
    
    
    (102,382
    )Proceeds from exercise of employee stock options
    
    
    68,004
    
    
    
    4,189Dividends on preferred stock
    
    
    (591,428
    )
    
    
    (923,196
    )Net cash provided by (used in) financing activities
    
    
    370,678
    
    
    
    (3,416,005
    )Effects of exchange rate changes on cash
    
    
    40,810
    
    
    
    5,283Net increase (decrease) in cash and cash equivalents
    
    
    537,390
    
    
    
    (4,216,634
    )Cash and cash equivalents at beginning of period
    
    
    2,615,379
    
    
    
    6,714,881Cash and cash equivalents at end of period
    
    $
    3,152,769
    
    
    $
    2,498,247
 See accompanying notes to consolidated financial statements
 6




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##### 



October 1,
    
    
    September 25,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    1,022,993
    
    
    $
    934,777Supplemental schedule of non-cash investing and
financing activities:Principal payments on long-term debt through
preferred pricing reductions
    
    $
    2,192,336
    
    
    $
    2,190,603Purchase of equipment with volume discount credit
    
    $
    
    
    
    $
    158,800Capital lease of property and equipment
    
    $
    41,501
    
    
    $
    
 See accompanying notes to consolidated financial statements
 7




---



##### 



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
   8




---



##### 



Comprehensive income
   Nine Months Ended
    
    Three Months EndedOctober 1,
    
    September 25,
    
    October 1,
    
    September 25,2005
    
    2004
    
    2005
    
    2004Net income (loss) for the period
    
    $
    290,188
    
    
    $
    (2,266,462
    )
    
    $
    210,464
    
    
    $
    (56,082
    )Other comprehensive income:Foreign currency translation
adjustments
    
    
    631,188
    
    
    
    183,709
    
    
    
    724,825
    
    
    
    486,339Comprehensive income (loss) for
the period
    
    $
    921,376
    
    
    $
    (2,082,753
    )
    
    $
    935,289
    
    
    $
    430,257
 Stock-based compensation
  9




---



##### 



Nine Months Ended
    
    Three Months EndedOctober 1,
    
    September 25,
    
    October 1,
    
    September 25,2005
    
    2004
    
    2005
    
    2004Net loss applicable to
common stockholders as
reported
    
    $
    (375,925
    )
    
    $
    (2,797,290
    )
    
    $
    (88,571
    )
    
    $
    (233,413
    )Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of tax
effects
    
    
    (1,137,000
    )
    
    
    (536,000
    )
    
    
    (390,000
    )
    
    
    (350,000
    )Pro forma, net loss
    
    $
    (1,512,925
    )
    
    $
    (3,333,290
    )
    
    $
    (478,571
    )
    
    $
    (583,413
    )Net income (loss) per shareBasicas reported
    
    $
    (0.01
    )
    
    $
    (0.09
    )
    
    $
    (0.00
    )
    
    $
    (0.01
    )Basicpro forma
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )Dilutedas reported
    
    $
    (0.01
    )
    
    $
    (0.09
    )
    
    $
    (0.00
    )
    
    $
    (0.01
    )Dilutedpro forma
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
  Reclassifications
  2. Discontinued operations
   10




---



##### 



Nine Months Ended
    
    Three Months EndedOctober 1,
    
    September 25,
    
    October 1,
    
    September 25,2005
    
    2004
    
    2005
    
    2004Net loss from
discontinued
operations
applicable to
common
stockholdersbasic
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    (0.01
    )Net loss from
discontinued
operations
applicable to
common
stockholdersdiluted
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    (0.01
    )
 3. Business Acquisitions
   4. Stockholders Equity
 Common stock
  5. Convertible Subordinated Notes
  11




---



##### 



6. Mandatorily Redeemable Convertible Preferred Stock
   12




---



##### 



7. Subordinated Notes and Warrant Liability
      13




---



##### 



8. Segments
  Clinics
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalHearing aids and other
products revenues9 months ended 10/1/05
    
    $
    53,642,000
    
    
    $
    65,000
    
    
    
    
    
    
    
    
    
    
    $
    53,707,0009 months ended 9/25/04
    
    
    46,571,000
    
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    46,617,000Service revenues9 months ended 10/1/05
    
    
    2,864,000
    
    
    
    
    
    
    
    1,132,000
    
    
    
    
    
    
    
    3,996,0009 months ended 9/25/04
    
    
    3,374,000
    
    
    
    
    
    
    
    783,000
    
    
    
    
    
    
    
    4,157,000Income (loss) from operations9 months ended 10/1/05
    
    
    11,883,000
    
    
    
    (51,000
    )
    
    
    613,000
    
    
    
    (9,000,000
    )
    
    
    3,445,0009 months ended 9/25/04
    
    
    8,961,000
    
    
    
    (12,000
    )
    
    
    312,000
    
    
    
    (7,745,000
    )
    
    
    1,516,0009 months ended 10/1/05Depreciation and
amortization
    
    
    1,290,000
    
    
    
    
    
    
    
    4,000
    
    
    
    152,000
    
    
    
    1,446,000Total assets
    
    
    49,932,000
    
    
    
    
    
    
    
    1,273,000
    
    
    
    13,019,000
    
    
    
    64,224,000Capital expenditures
    
    
    659,000
    
    
    
    
    
    
    
    
    
    
    
    135,000
    
    
    
    794,0009 months ended 9/25/04Depreciation and
amortization
    
    
    1,363,000
    
    
    
    
    
    
    
    4,000
    
    
    
    211,000
    
    
    
    1,578,000Total assets
    
    
    47,324,000
    
    
    
    
    
    
    
    1,481,000
    
    
    
    11,444,000
    
    
    
    60,249,000Capital expenditures
    
    
    307,000
    
    
    
    
    
    
    
    2,000
    
    
    
    26,000
    
    
    
    335,000
   14




---



##### 



As of October 1, 2005
    
    
    As of September 25, 2004United States
    
    
    Canada
    
    
    United States
    
    
    Canada2005
    
    
    2005
    
    
    2004
    
    
    2004Hearing aid and
other product
revenues
    
    $
    47,835,000
    
    
    $
    5,872,000
    
    
    $
    41,908,000
    
    
    $
    4,709,000Service revenues
    
    
    3,693,000
    
    
    
    303,000
    
    
    
    3,931,000
    
    
    
    226,000Long-lived assets
    
    
    41,406,000
    
    
    
    10,300,000
    
    
    
    39,179,000
    
    
    
    9,432,000Total assets
    
    
    51,371,000
    
    
    
    12,853,000
    
    
    
    49,034,000
    
    
    
    11,215,000
  9. Recent Accounting Pronouncements
  10. Liquidity
  
 15




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##### 



Forward Looking Statements
 This form 10-Q and in particular, this Managements Discussion and analysis contain or incorporate
a number of forward-looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Act of 1934. 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 October 1, 2005 compared to the three months ended and September 25,
2004
  16




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##### 



17




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##### 



For the nine months ended October 1, 2005 compared to the nine months ended September 25,
2004
   18




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##### 



19




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##### 



LIQUIDITY AND CAPITAL RESOURCES
     20




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##### 



Payments due by periodLess
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    than 5Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsContractual obligationsLong-term debt (1)
    
    $
    21,061,000
    
    
    $
    3,669,000
    
    
    $
    16,764,000
    
    
    $
    628,000
    
    
    $
    Interest to be paid on long-term debt (2)
    
    
    657,000
    
    
    
    160,000
    
    
    
    479,000
    
    
    
    18,000
    
    
    
    Operating leases
    
    
    16,897,000
    
    
    
    5,039,000
    
    
    
    9,147,000
    
    
    
    1,909,000
    
    
    
    802,000Convertible subordinated notes (3)
    
    
    7,500,000
    
    
    
    1,875,000
    
    
    
    5,000,000
    
    
    
    625,000
    
    
    
    Subordinated notes
    
    
    5,500,000
    
    
    
    1,760,000
    
    
    
    3,740,000
    
    
    
    
    
    
    
    Interest to be paid on convertible
subordinated notes
    
    
    1,124,000
    
    
    
    599,000
    
    
    
    517,000
    
    
    
    8,000
    
    
    
    Interest to be paid on subordinated notes
    
    
    613,000
    
    
    
    331,000
    
    
    
    282,000
    
    
    
    Employment agreements
    
    
    4,186,000
    
    
    
    1,135,000
    
    
    
    2,016,000
    
    
    
    1,035,000
    
    
    
    Purchase obligations
    
    
    1,270,000
    
    
    
    595,000
    
    
    
    675,000
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    58,808,000
    
    
    $
    15,163,000
    
    
    $
    38,620,000
    
    
    $
    4,223,000
    
    
    $
    802,000
 
 (1)
    
    Approximately $3.0 million (Tranches A, B and C) can be repaid through preferred pricing
reductions from Siemens, including $2.5 million in less than 1 year and, $500,000 in years
1-3.(2)
    
    Interest on long-term debt excludes $1,045,000 of accrued but unpaid interest on Tranche D
presented with long-term debt in (1) above. In addition, approximately $211,000 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.  21




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##### 



CRITICAL ACCOUNTING POLICIES
  Goodwill
  Revenue recognition
  22




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##### 



Allowance for doubtful accounts
   Sales returns
  RECENT ACCOUNTING PRONOUNCEMENTS
  23




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##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Long-term, Convertible Subordinated Notes and Subordinated Notes (in thousands)VariableRate
    
    
    
    Fixed RateYr 1  211%Yr 3  5Prime Rate
    
    
    
    7%
    
    
    8%As of
    
    + 1% note
    
    
    
    due
    
    
    due
    
    
    
    
    
    
    
    
    
    
    10 % noteOctober
    
    due April
    
    
    
    August
    
    
    November
    
    
    10 % notes
    
    
    10 % notes
    
    
    due Dec 1,1, 2005:
    
    2007
    
    
    
    2008
    
    
    2008
    
    
    due 2008
    
    
    due 2007
    
    
    2006
    
    
    Other notes
    
    
    
    TotalEstimated cash
inflow (outflow) by
fiscal year of
principal maturity
    
    $
    
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    
    $2005
    
    
    (536
    )
    
    
    
    (440
    )
    
    
    
    
    
    
    (155
    )
    
    
    (154
    )
    
    
    (575
    )
    
    
    (339
    )
    
    
    
    (2,199
    )2006
    
    
    
    
    
    
    
    (1,760
    )
    
    
    (2,500
    )
    
    
    (657
    )
    
    
    (621
    )
    
    
    (1,300
    )
    
    
    (834
    )
    
    
    
    (7,672
    )2007
    
    
    (13,509
    )
    
    
    
    (1,760
    )
    
    
    (2,500
    )
    
    
    (726
    )
    
    
    (320
    )
    
    
    
    
    
    
    (687
    )
    
    
    
    (19,502
    )2008
    
    
    
    
    
    
    
    (1,540
    )
    
    
    (2,500
    )
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    (306
    )
    
    
    
    (4,539
    )2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    
    (84
    )Total
    
    
    (14,045
    )
    
    
    
    (5,500
    )
    
    
    (7,500
    )
    
    
    (1,731
    )
    
    
    (1,095
    )
    
    
    (1,875
    )
    
    
    (2,250
    )
    
    
    
    (33,996
    )Estimated fair value
    
    
    (14,045
    )
    
    
    
    (5,500
    )
    
    
    (7,500
    )
    
    
    (1,731
    )
    
    
    (1,095
    )
    
    
    (1,875
    )
    
    
    (2,250
    )
    
    
    
    (33,996
    )Carrying Value
    
    
    (14,045
    )
    
    
    
    (5,500
    )
    
    
    (7,500
    )
    
    
    (1,731
    )
    
    
    (1,095
    )
    
    
    (1,875
    )
    
    
    (2,250
    )
    
    
    
    (33,996
    )
 Item 4. Controls and Procedures
   24




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##### 



Part II Other Information
 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*
    
    Employment Agreement between Dr. Paul A. Brown and HearUSA, Inc., dated August 31, 200510.2*
    
    Employment Agreement between Stephen J. Hansbrough and HearUSA, Inc., dated August 31, 200510.3*
    
    Employment Agreement between Gino Chouinard and HearUSA, Inc., dated August 31, 200510.4*
    
    Employment Agreement between Ken Schofield and HearUSA, Inc., dated August 31, 200510.5*
    
    Form of Change in Control Agreement31.1
    
    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*
    Signifies management
compensatory plan, contract or arrangement.
 25






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##### 



SIGNATURES
  HearUSA Inc.(Registrant)November 9, 2005/s/ Stephen J. HansbroughStephen J. HansbroughChief Executive OfficerHearUSA, Inc./s/ Gino ChouinardGino ChouinardChief Financial OfficerHearUSA, Inc.
 26