UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A
(Amendment No. 1)

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

     (Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended                      DECEMBER 31, 2005

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from                                          to

Commission file number 001-11655

HearUSA, Inc.

Exact Name of Registrant as Specified in Its Charter

Delaware		22-2748248
(State of Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

1250 Northpoint Parkway, West Palm Beach, Florida		33407
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code      (561) 478-8770     

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.10 per share		American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:      None

     Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.       Yes o      No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.       Yes o      No þ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
      Yes þ      No o

     Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K. [ ]

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “non-accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

     Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).      Yes o      No þ

     As of July 2, 2005, the aggregate market value of the registrant’s Common Stock held by non-affiliates (based upon the closing price of the Common Stock on the American Stock Exchange) was approximately $44,699,073.

     On March 20, 2006, 31,379,538 shares of the registrant’s common stock and 780,358 of exchangeable shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of registrant’s definitive proxy statement for the 2006 Annual Meeting of the registrant’s stockholders (“2006 Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III hereof.

 

 

Explanatory Note

HearUSA, Inc. (“the Company) is filing this Amendment No. 1 on Form 10-K/A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which was filed with the Securities and Exchange Commission on March 31, 2006 (the “Original Filing”), to correct an error relating to the valuation of the warrant liability appearing on the consolidated balance sheets. For the 2005 fiscal year, the Company originally recorded $1.9 million related to the warrant liability. Due to the fluctuation in the Company’s common stock price at the end of 2005 the warrant liability should have been reduced to approximately $1.3 million and the Company should have reduced interest expense by approximately $513,000 in its consolidated statements of operations. Instead the Company recorded an increase of approximately $9,000. The correction of this error resulted in an increase to the previously reported warrant liability balance at October 1, 2005 and an increase of the previously reported interest expense for the quarter ended October 1, 2005 of approximately $76,000. The correction of this error also resulted in a decrease to the previously reported warrant liability balance at December 31, 2005 and decrease of the previously reported interest expense for the quarter ended December 31, 2005 of approximately $598,000. These corrections resulted in a reduction of the net loss applicable to common stockholders previously reported of approximately $1.8 million to approximately $1.3 million for the year ended December 31, 2005.

     The following items have been amended as a result of the correction described above:

	•		Part II — Item 6 — Selected Financial Data
	•		Part II — Item 7 — Managements Discussion and Analysis
	•		Part II — Item 8 — Financial Statements and Supplementary Data
	•		Part II — Item 9A. —Controls and Procedures
	•		Part IV — Item 15 — Exhibits and Financial Statement Schedules

PART II

Item 6. Selected Financial Data

The following selected financial data of the Company should be read in conjunction with the consolidated financial statements and notes thereto and the following Management’s Discussion and Analysis of Financial Condition and Results of Operations. The financial data set forth on the next two pages has been derived from the audited consolidated financial statements of the Company:

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

		Year Ended
		Restated see
		Note 22
		December 31				December 25				December 27				December 28				December 29
		2005-				2004				2003				2002 (1)				2001
Net revenues		$	76,672,003			$	68,749,542			$	67,080,108			$	55,038,793			$	48,796,110
Total operating costs and expenses			72,957,087				66,411,162				64,812,179				59,350,819				56,995,460
Income (loss) from operations			3,714,916				2,338,380				2,267,929				(4,312,026	)			(8,199,350	)
Non-operating income (expenses):
Gain from insurance settlement (2)			430,122				—				—				—				—
Interest income			53,921				17,543				20,836				114,152				222,349
Interest expense (including approximately $2,540,000, $2,127,000 and $517,000, in 2005, 2004 and 2003, of non-cash debt discount amortization and approximately $513,000 in non-cash reduction in interest expense for the decrease in the fair value of the warrant liability in 2005)			(4,640,558	)			(4,563,729	)			(2,828,327	)			(1,722,990	)			(652,530	)
Loss before equity in loss of affiliated company and loss from discontinued operations			(441,599	)			(2,207,806	)			(539,562	)			(5,920,864	)			(8,629,531	)
Equity in loss of affiliated company			—				—				—				(630,801	)			—
Loss from continuing operations
before income taxes			(441,599	)			(2,207,806	)			(539,562	)			(6,551,665	)			(8,629,531	)
Income taxes			(78,000	)			—				—				—				—
Net loss from continuing operations			(519,599	)			(2,207,806	)			(539,562	)			(6,551,665	)			(8,629,531	)
Loss from discontinued operations			(63,553	)			(550,696	)			(569,827	)			(328,804	)			—
Dividends on preferred stock			(700,675	)			(708,159	)			(626,956	)			(696,541	)			(812,205	)
Net loss applicable to common stockholders		$	(1,283,827	)		$	(3,466,661	)		$	(1,736,345	)		$	(7,577,010	)		$	(9,441,736	)
Loss per common share
Basic and diluted, loss from continuing operations, including dividends on preferred stock		$	(0.04	)		$	(0.10	)		$	(0.04	)		$	(0.32	)		$	(0.72	)
Basis and diluted, net loss applicable to common stockholders		$	(0.04	)		$	(0.11	)		$	(0.06	)		$	(0.34	)		$	(0.72	)
Weighted average number of common shares outstanding			31,610,793				30,426,829				30,424,262				22,534,393				13,120,137
Cash dividends per common share		None				None				None				None				None

BALANCE SHEET DATA:

		As of
		December 31				December 25				December 27				December 28				December 29
		2005				2004				2003				2002 (1)				2001
Total assets		$	68,981,545			$	59,422,361			$	66,183,350			$	64,996,870			$	21,341,522
Working capital deficit			(3,118,353	)			(4,898,459	)			(2,330,035	)			(10,231,372	)			(738,562	)
Long-term debt:
Long-term debt, net of current maturities			19,970,099				17,296,125				20,579,977				22,082,389	(2)			8,750,999
Convertible subordinated notes and subordinated notes, net of debt discount of $2,077,537, $5,443,879 and $7,423,596			6,222,463				2,056,121				76,404				—				—
Mandatorily redeemable convertible preferred stock			—				4,709,921				4,600,107				—				—

Item 7.		Management’s Discussion and Analysis of Results of Operations and Financial Condition

GENERAL

In 2005, the Company initiated a strategic acquisition and divestiture program in order to improve its profitability and accelerate its growth. In June 2005 the Company divested 20 centers located in the states of Washington, Minnesota and Wisconsin. The centers have been presented as discontinued operations in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long Term Assets, and the assets and operating results of these hearing centers for all periods presented have been segregated. (See Note 19 — Discontinued Operations, Notes to the Consolidated Financial Statements included herein.) The Company also completed several acquisitions in the second half of 2005.

Also during the year, the Company completed a private placement of subordinated notes in the amount of $5.5 million, the proceeds of which were used to redeem the Series E Convertible Preferred Stock originally issued in August of 2003. (See Note 8— Subordinated Notes and Warrant Liability and Note 9— Mandatorily Redeemable Convertible Preferred Stock, Notes to the Consolidated Financial Statements included herein.)

On December 28, 2005 the Company and Siemens signed a term sheet with the intent to extend their relationship for an additional 5 years. The same day, Siemens provided the Company with an additional $5.0 million to be used to repay existing non-Siemens debts and for acquisitions. (See Note 6a — Long-Term Debt, Notes to the Consolidated Financial Statements included herein and Liquidity and Capital Resources and Recent Developments below.).

Overall, the Company’s net loss decreased $2.2 million and income from operations increased $1.4 million from 2004 to 2005. These improvements were mostly attributable to the increase in the Company’s revenues of $7.9 million during the year combined with a strong control over operating expenses and a decrease in the fair value of the warrant liability due to the Company’s fluctuation in stock price. Management expects income from operations to continue improving as the Company’s revenues continue to increase.

RESULTS OF OPERATIONS

2005 compared to 2004

Net revenues in 2005 increased approximately $7.9 million or 11.5% from 2004. The increase is comprised of an increase in hearing aids and other products revenues of approximately $8.2 million or 13.0%, partially offset by a reduction in service revenues of approximately $295,000 or 5.3%. The increase in hearing aids and other products revenues is mostly attributable to an increase in the average selling price of approximately 10.3% over the 2004 average selling price, resulting from patients selecting a higher percentage of advanced technology hearing aids, combined with an increase in the number of hearing aids sold of approximately 3.4%. The decrease in service revenues is due to lower revenues from the Company’s contract with the Department of Veteran Affairs in 2005 compared to 2004. As part of the overall increase in revenues, approximately $1.4 million relates to the additional week in 2005 compared to 2004 due to the timing of the Company’s accounting calendar and approximately $1.3 million was generated from the centers acquired in the second half of 2005. Also part of the overall increase is a favorable impact of $575,000 related to the change in the Canadian exchange rate from 2004 to 2005.

Total cost of products sold and services in 2005 increased approximately $3.5 million or 18.4%, including a 19.8% increase in hearing aids and other products sold of approximately $3.5 million and a 4.4% increase in services cost of approximately $76,000. Increase in the cost of hearing aids and other products is attributable to the corresponding increase in hearing aids and other products revenues and increase in the number of advanced technology hearing aids sold. Included in the cost of hearing aids

and other products are Siemens preferred pricing reductions of approximately $3.3 million in 2005 and $3.6 million in 2004, respectively. Such pricing reductions from Siemens are accounted for as reductions of cost of products sold and applied, pursuant to the Siemens credit agreement, against the principal and interest payments due to Siemens on Tranches A, B and C of the Siemens loan (See Note 6a — Long-Term Debt, Notes to the Consolidated Financial Statements included herein, Liquidity and Capital Resources and Recent Developments, below). The total cost of products sold and services, as a percent of net revenues, increased to 29.7% in 2005 from 28.0% in 2004 due to the increase in advanced technology hearing aids sold, which have lower margins, and special introductory price promotions on new Siemens products. Also, 2004 benefited from higher revenues from the Department of Veteran Affairs which are primarily services with no cost of products sold. Management expects that in 2006 the cost of products sold as a percent of revenues will be consistent with that of 2005.

Center operating expenses in 2005 increased approximately $1.7 million, or 4.8% from 2004. This increase is mainly attributable to the additional week in 2005; an increase in incentive compensation related to additional net revenues and new incentive programs and increased wages due to normal merit increases as well as additional expenses of approximately $449,000 related to the acquired centers discussed above. Total center operating expenses for 2006 will be affected by any center acquisitions.

General and administrative expenses in 2005 increased approximately $1.4 million or 14.1% from 2004. This increase is attributable to increases in wages and other expenses related to new sales and business development departments and normal annual merit increases.

Depreciation and amortization expense in 2005 decreased approximately $98,000 or 4.7%. This net decrease is comprised of a decrease of approximately $533,000 due to certain property and equipment becoming fully depreciated, offset in part by an increase of approximately $435,000 due to the acquisition of approximately $1.2 million in fixed assets and approximately $826,000 in intangible assets during the year.

The gain from insurance settlement of approximately $430,000 in 2005 is from insurance proceeds and final payment resulting from 2004 hurricane damages and business interruption claims sustained in Florida hearing care centers.

Interest expense in 2005 increased approximately $77,000 or 1.7% over 2004. This increase is attributable to approximately $595,000 of interest (including the non-cash portion of approximately $389,000) on the $5.5 million financing that was completed in August 2005 and approximately $309,000 due to the impact of the higher interest rates on the Siemens Tranche D which is at prime plus 1%. These increases were offset in part by a decrease of interest on other existing balances due to repayments of principal and a non-cash reduction in interest expense that did not exist in 2004 of approximately $513,000 related to a decrease in the fair market value of the warrant liability caused by the decrease in the stock price during 2005 (See Note 8 — Subordinated Notes and Warrant Liability, Notes to the Consolidated Financial Statements included herein). The non-cash charge of $2.5 million included in the interest expense is $2.2 million in amortization of the debt discount related to the $7.5 million convertible subordinated notes (See Note 7 — Convertible Subordinated Notes, Notes to the Consolidated Financial Statements included herein) and $389,000 in amortization of the debt discount related to the $5.5 million subordinated notes (See Note 8 — Subordinated Notes and Warrant Liability, Notes to the Consolidated Financial Statement included herein). These non-cash charges do not impact the liquidity or working capital of the Company. Also included in interest expense is the 2005 interest on the Siemens Tranche A, B and C totaling $389,000 in 2005 as compared with $720,000 in 2004, which were paid through preferred pricing reductions from Siemens (See Note 6a — Long-Term Debt, Notes to the Consolidated Financial Statements included herein and Liquidity and Capital Resources below). Management expects interest expense will increase in 2006 over 2005 levels as a result of the additional $5 million loan from Siemens late in 2005 and a full year of 2006 interest relating to the $5.5 million subordinated notes issued in August of 2005. The interest expense could be affected by the use of the Siemens credit facility for acquisitions in 2006. Early payment or conversion of the $7.5 million convertible subordinated notes and/or the $5.5 million subordinated notes would result in acceleration of the debt discount amortization and therefore an increase in non-cash interest expense.

The redemption of the Series E Convertible Preferred Stock in September 2005 resulted in a $142,500 decrease in dividends on preferred stock which was offset by the premium of $135,000 paid for redeeming such preferred stock before the expiration of its term.

The Company has net operating loss carryforwards of approximately $76 million for U.S. income tax purposes and approximately $2.5 million of operating loss carryforwards in Canada.

During 2005 and 2004, HEARx West generated net income of approximately $2.3 million and $1.4 million, respectively. The HEARx West members’ deficit decreased from approximately $3.2 million at the end of 2004 to approximately $876,000 at the end of 2005. According to the Company’s agreement with the Permanente Federation, the Company included in its statement of operations 100% of the losses incurred by the venture since its inception and will receive 100% of the net income of the venture until the members’ deficit is eliminated. At such time as the members’ deficit is eliminated and if the venture continues to be profitable, the Company will begin recording a minority interest, corresponding to 50% of the venture’s net income, as an expense in the Company’s consolidated statement of operations and with a corresponding liability on its consolidated balance sheet. Based on the 2005 performance of the venture, it is expected that the Company will begin recording and paying a minority interest in 2006.

2004 compared to 2003

Net revenues in 2004 increased approximately $1.7 million or 2.5%. The increase in hearing aid and other product revenues during 2004 compared to 2003 is primarily attributable to an increase of approximately $1.9 million due to the Company’s new contract with the Department of Veteran Affairs. A decrease of approximately $631,000 in service revenues resulted from decreases in repairs and testing. A decrease of approximately 5.0% in the number of hearing aids sold during the year was offset by an increase in the average selling price of approximately 4.9% as patients selected a higher percentage of high end technology hearing aids. Approximately $485,000 of the overall increase in revenues relates to a favorable change in the average Canadian exchange rate from 2003 to 2004.

Cost of products sold in 2004 decreased approximately $264,000 or 1.4%. Included in the cost of products sold are Siemens preferred pricing reductions of approximately $3,641,000 in 2004 and $3.9 million in 2003, respectively. Such pricing reductions from Siemens are accounted for as reductions of cost of products sold for financial reporting purposes and applied, pursuant to the Siemens credit agreement, against the principal and interest payments due to Siemens on Tranches A, B and C of the Siemens loan (see Note 6a., Notes to the Consolidated Financial Statements, Liquidity and Capital Resources and Recent Developments below.) The cost of products sold, as a percent of net revenues, was essentially unchanged at 28.0% and 28.3% in 2004 and 2003, respectively.

Center operating expenses in 2004 increased approximately $2.3 million, or 7.1% from 2003. This increase is mainly attributable to an increase in compensation and marketing in 2004 compared to 2003 of approximately $1.3 million and $905,000, respectively. The increase in compensation is attributable in part to annual increases to employees and new employees at the center level and in part to increases in commissions. The increase in commissions is due to changes to some of the compensation programs at the end of the second quarter of 2003 and increases in revenues in regions and/or sectors with higher commission rates. The increase in marketing is attributable to increases in the frequency in the Company’s advertising to the private pay sector and additional mailers to members of managed care companies in 2004 compared to the prior year.

General and administrative expenses in 2004 decreased approximately $252,000, or 2.4%. This decrease is mainly attributable to a reduction of expenses of approximately $159,000 resulting from a volume discount for telephone expense, and a reduction of professional fees of approximately $576,000. These decreases were offset by an increase in wages and fringe benefits of approximately $291,000, due to an increase in salaries and in additional employees, and an increase in public and shareholder relations expense of approximately $174,000.

Depreciation and amortization expense in 2004 decreased approximately $712,000 or 25.6%. This decrease is due to certain property and equipment being fully depreciated.

Interest expense in 2004 increased approximately $1.7 million or 61% over 2003. This increase is attributable to approximately $2.9 million of interest (including the non-cash portion of approximately $2.1 million) on the $7.5 million financing that was completed in December 2003. These increases were offset by a decrease of interest on other existing balances due to repayments of principal during 2003 and the beginning of 2004. The non-cash charge of $2.1 million 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 impact the liquidity or working capital of the Company.

LIQUIDITY AND CAPITAL RESOURCES

On December 7, 2001, the Company obtained a secured credit facility from Siemens comprised of (a) a $10,875,000 secured five-year term loan credit facility (the Tranche A Loan); (b) a $25,000,000 secured five-year revolving loan credit facility (the Tranche B Loan); (c) a $3,000,000 secured five-year term loan facility (the Tranche C Loan) and (d) a $13,000,000 secured five-year term loan credit facility (the Tranche D Loan). On March 14, 2003, the Company obtained an additional $3,500,000 secured five-year term loan from Siemens bearing interest at a rate of 10% annually (the Tranche E Loan). The Tranche E Loan was obtained pursuant to an amendment to the Company’s credit agreement with Siemens and is otherwise subject to the terms and conditions of the credit agreement and related security agreement. On December 28, 2005, the Company obtained an additional $5,000,000, bearing interest at prime plus 1% and having a five-year term (the Tranche F Loan). At December 31, 2005 approximately $23.1 million, representing principal on the Tranche A, B, C, D, E and F Loans was outstanding. See “Recent Developments” below for a discussion of the amended and restated Siemens agreements.

The Siemens credit agreement imposes certain financial and other covenants on the Company which are customary for loans of this size and nature, including restrictions on the conduct of the Company’s business, the incurrence of indebtedness, merger or sale of assets, the modification of material agreements, changes in capital structure, making certain payments and paying dividends. If the Company cannot maintain compliance with these covenants, Siemens may terminate future funding under the credit facility and declare all then outstanding amounts under the facility immediately due and payable. In addition, a material breach of the supply agreement between the Company and Siemens may be declared to be a breach of the credit agreement 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. As of December 31, 2005, the Company was in compliance with the credit facility’s covenants and the supply agreement.

During 2005, the working capital deficit decreased $1.8 million to $3.1 million as of December 31, 2005 from $4.9 million as of December 27, 2004. The decrease in the deficit is attributable to an excess of approximately $4.0 million in cash from operations and financing activities over cash used for investing activities offset by an increase in current maturities of long-term debt, convertible subordinated notes and subordinated notes of approximately $2.8 million. The working capital deficit of $3.1 million includes approximately $3.0 million representing the current maturities of the long-term debt to Siemens which may be repaid through preferred pricing reductions and approximately $652,000 ($2.5 million in current maturities, net of $1.5 million of debt discount) related to the $7.5 million convertible subordinated notes that can be repaid by either cash or stock, at the option of the Company. In 2005, the Company generated income from operations of approximately $3.7 million compared to $2.3 million in 2004. Cash and cash equivalents as of December 31, 2005 were approximately $6.7 million.

Net cash from operating activities in 2005 increased approximately $1.5 million compared to 2004, which is mainly attributable to the reduction of $2.2 million in the Company’s net loss from 2004 to 2005, partially offset by a reduction in interest expense of approximately $513,000 related to a decrease in the fair value of the warrant liability during 2005, which did not exist in 2004. Reductions in cash flows in 2005 from 2004 resulted from the timing in the collection of our December 2005 capitation payment of approximately $575,000 from Kaiser Permanente, collected in early January 2006 as opposed to December in 2004, and

the payment of January rents before the end of the fiscal year in 2005 compared to after fiscal year end in 2004, due to the timing of the Company’s accounting calendar. These reductions were however offset by corresponding increases in cash flows from increases in accounts payable and accrued salaries, due to timing in payments.

Other sources of funds in 2005 were the proceeds from the divestiture of some centers of approximately $1.1 million, the exercise of warrants of approximately $1.8 million and the issuance of long-term debt of $5 million to Siemens in December 2005 and of approximately $5.2 million (net of $330,000 issuing cost) to purchasers of subordinated notes in August of 2005. Proceeds from the issuance of the subordinated notes were used to redeem the $4.9 million Series E Convertible Preferred Stock. 2004 did not benefit from any other significant sources of funds.

During 2005, the Company initiated an acquisition program and used cash of approximately $1.6 million to complete the acquisition of several centers during the second half of the year. No acquisitions were made in 2004. Also, additional funds were used in 2005 compared to 2004 (increase from $343,000 in 2004 to approximately $1.2 million in 2005) to upgrade audiological and call center equipment and software as well as for leasehold improvements related to center upkeep and maintenance.

Funds were also used in 2005 for long-term debt repayment of approximately $1.7 million, a reduction of $1.6 million from 2004. In 2004, a payment of $1.8 million was made to Siemens as required under the Siemens credit agreement, corresponding to 25% of the proceeds of the $7.5 million convertible subordinated notes issued in December 2003. A $440,000 payment was also made in 2005 related to the 2005 subordinated notes corresponding to the first quarterly payment due to the holders of the notes. The use of funds for dividends on preferred stock reduced from $1.1 million to $770,000 as 2004 included additional payments necessary to pay off accrued and unpaid dividends, in accordance with the Company’s agreement with the holders of the Series E Convertible Preferred Stock.

The Company believes that current cash and cash equivalents and cash flow from operations, at current net revenue levels, will be sufficient to support the Company’s operational needs through the next twelve months, although there can be no assurance that the Company can maintain compliance with the Siemens’ loan covenants, that net revenue levels will remain at or higher than current levels or that unexpected cash needs will not arise for which the cash, cash equivalents and cash flow from operations will not be sufficient. In the event of a shortfall in cash, the Company might consider short-term debt, or additional equity or debt offerings. There can be no assurance however, that such financing will be available to the Company on favorable terms or at all. The Company also is continuing its aggressive cost controls and sales and gross margin improvements.

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 December 31, 2005.

		Payments due by period (000's)
						Less												More
						than 1				1 - 3				4 - 5				Than 5
Contractual obligations		Total				year				years				Years				years
			$				$				$				$				$
Long-term debt (1)			25,162				5,192				9,353				9,362				1,255
Convertible subordinated notes (3)			7,500				2,500				5,000				—				—
Subordinated notes			5,060				1,760				3,300				—				—
Subtotal of obligations recorded on balance sheet			37,722				9,452				17,653				9,362				1,255
Interest to be paid on long-term debt (2)			3,419				1,175				1,546				680				18
Interest to be paid on convertible subordinated notes (3)			928				512				416				—				—
Interest to be paid on subordinated notes			519				300				219				—				—
Operating leases			18,935				5,368				10,759				2,070				738
Employment agreements			3,903				1,135				1,868				900				—
Purchase obligations			1,356				756				600				—				—
Total contractual cash obligations			66,782				18,698				33,061				13,012				2,011

RECENT DEVELOPMENTS

On February 10, 2006, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”), Amended and Restated Supply Agreement (the “Amended Supply Agreement”) and an Amended and Restated Security Agreement with Siemens. Pursuant to the amended agreements the Company will continue its strategic relationship with Siemens for an additional five-year term. We have restructured the outstanding $23.1 million indebtedness of the Company to Siemens under the original credit agreement. The new facility is for a total of $26 million, including the currently outstanding $23.1 million and is structured in three tranches. The effect of the Amended Credit Facility has been recorded as if it had occurred on December 31, 2005.

The new Tranche A, with a principal balance of approximately $2.2 million and imputed interest of 10% per annum, is payable in three quarterly installments of $747,000 commencing with the first quarter of 2006. The payments are subject to rebate credits as described below.

The new Tranche B is a revolving line of credit established to accommodate funding for certain acquisitions by the Company. Pursuant to the Amended Credit Agreement, the Company may borrow under Tranche B up to the $26 million limit, less any amounts then outstanding under Tranche A and Tranche C.

The new Tranche C, with a principal balance on the closing date of approximately $20.9 million and an interest rate of prime plus 1% per annum, is payable in monthly principal and interest installments of $130,000 commencing February 15, 2006. In addition, the Company must make quarterly installment

payments on Tranche C of $730,000 plus interest commencing with the fourth quarter of 2006. The quarterly payments may be satisfied using rebate credits described below. Additional loans may be made to the Company under Tranche C for certain acquisitions. The monthly installment payments are intended to repay approximately $6.6 million of the Tranche C principal balance. The remaining principal balances of Tranche C, as well as Tranche A and Tranche B, with interest, will continue to be eligible for repayment utilizing rebates on purchases of hearing aids from Siemens, provided that the Company purchases, under the Amended Supply Agreement, certain percentages of the hearing aids it sells. The Amended Credit Agreement also contemplates that the Company will reduce the Tranche C loan balance by making annual payments in an amount equal to 20% of Excess Cash Flow (as defined in the agreement), and by paying to Siemens 25% of proceeds from future equity offerings.

Substantially all of the Company’s assets collateralize the notes payable to Siemens. Pursuant to the Amended Supply Agreement, the Company agreed to purchase from Siemens certain minimum percentages of the Company’s hearing aid purchases for a period of five years. A material breach of the Amended Supply Agreement may be declared to be a breach of the Amended Credit Agreement and Siemens would have the right to declare all amounts outstanding under the credit facility immediately due and payable. Any non-compliance with the Amended Supply Agreement could have a material adverse effect on the Company’s financial condition and continued operations.

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 at least 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 during 2005 and 2004, and each of these tests indicated no impairment. The Company estimates the fair value of its reporting units by applying a weighted average of three methods: quoted market price, external transactions, and discounted cash flow. Significant changes in key assumptions about the business and its prospects, or changes in market conditions, stock price, interest rates or other externalities, could result in an impairment charge.

Revenue recognition

Revenues from the sale of audiological products are recognized at the time of delivery. Revenues from hearing care services are recognized at the time those services are performed.

The Company has capitation contracts with certain health care organizations under which the Company is paid an amount for each enrollee of the health maintenance organization to provide to the enrollee a 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. Capitation revenue is earned as a result of agreeing to provide services to members without regard to the actual amount of service provided; revenue is recorded in the period that the beneficiaries are entitled to hearing care services.

Allowance for doubtful accounts

Certain of the accounts receivable of the Company are from health insurance and managed care organizations and government agencies. These organizations could take up to nine months before paying a claim made by the Company and also impose a limit on the time the claim can be billed. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions, and a review of the current status of each customer’s trade accounts receivable.

In order to calculate that allowance, the Company first identifies any known uncollectible amounts in its accounts receivable listing and charges them against the existing allowance for doubtful accounts. Then a specific percent per plan and per aging categories is applied against the remaining receivables to estimate the needed allowance. Any changes in the percent assumptions per plan and aging categories results in a change in the allowance for doubtful accounts. For example, an increase of 10% in the percent applied against the remaining receivables would increase the allowance for doubtful accounts by approximately $20,000.

Sales returns

The Company provides to all patients purchasing hearing aids a specific return period of at least 30 days if the patient is dissatisfied with the product. The Company provides an allowance in accrued expenses for returns. The return period can be extended to 60 days if the patient attends the Company’s H.E.L.P. program. The Company calculates its allowance for returns using estimates based upon actual historical returns. The cost of the hearing aid is reimbursed to the Company by the manufacturer.

RECENT ACCOUNTING PRONOUNCEMENT

In December 2004, SFAS No. 123(R), “Share-Based Payment,” which addresses the accounting for employee stock options, was issued. SFAS No. 123(R) revises the disclosure provisions of SFAS 123, “Accounting for Stock Based Compensation” and supersedes APB Opinion 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. This statement is effective for all public entities beginning the first interim after December 15, 2005. The Company plans to implement SFAS 123 (R) on its effective date. Based on the outstanding number of employee stock options and excluding the impact of any future grants at December 31, 2005, the total stock-based employee compensation expense determined under the fair value method that would be reflected in the financial statements is approximately $1,529,000 in 2005 (See Note 1 — Description of the Company and Summary of Significant Accounting Policies- stock-based compensation) and $930,000 in 2006. This additional expense will not affect the Company’s operating cash flows.

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections- A Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). This statement requires that a voluntary change in accounting principle be applied retroactively with all prior period financial statements presented on the basis of the new accounting principal, unless it is impractical to do so. SFAS 154 also requires that a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for prospectively as a change in estimate, and correction of errors in previously issued financial statements should be termed a “restatement”. The new standard is effective for accounting changes and a correction of errors made in fiscal years beginning after December 15, 2005. We will adopt this pronouncement in fiscal year 2006.

Item 8. Financial Statements and Supplementary Data

		Page
Index to Financial Statements
Financial Statements:
Report of Independent Registered Public Accounting Firm			16
Consolidated Balance Sheets at December 31, 2005 and December 25, 2004			17
Consolidated Statements of Operations for the years ended December 31, 2005, December 25, 2004, and December 27, 2003			18
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2005, December 25, 2004 and December 27, 2003			19
Consolidated Statements of Cash Flows for the years ended December 31, 2005, December 25, 2004, and December 27, 2003			21
Notes to Consolidated Financial Statements			23
Financial Statement Schedule:
II Valuation and Qualifying Accounts — For the years ended December 31, 2005 December 25, 2004 and December 27, 2003			47

Report of Independent Registered Public Accounting Firm

Board of Directors
HearUSA, Inc.
West Palm Beach, Florida

We have audited the accompanying consolidated balance sheets of HearUSA, Inc. as of December 31, 2005 and December 25, 2004, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three fiscal years in the period ended December 31, 2005. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HearUSA, Inc. at December 31, 2005 and December 25, 2004, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.

As discussed in Note 22, the Company has restated certain amounts previously reported as of and for the years ended December 31, 2005.

BDO Seidman, LLP

West Palm Beach, Florida
March 17, 2006. (May 10, 2006 as to note 22
and the effects of the restatement)

HearUSA, Inc.
Consolidated Balance Sheets

		Restated see
		Note 22
		December 31,				December 25,
ASSETS (Note 6)		2005				2004
Current assets
Cash and cash equivalents		$	6,706,944			$	2,615,379
Restricted cash and cash equivalents (Note 2)			431,000				435,000
Accounts and notes receivable, less allowance for doubtful accounts of $413,386 and $373,583			6,715,933				5,997,245
Inventories			1,604,943				801,234
Prepaid expenses and other			1,627,407				557,435
Current assets held for sale			—				77,458
Total current assets			17,086,227				10,483,751
Property and equipment, net (Notes 3 and 6)			3,474,381				3,346,788
Goodwill (Notes 4 and 5)			36,394,959				33,210,380
Intangible assets, net (Notes 4 and 5)			11,440,345				11,094,169
Deposits and other			585,633				551,148
Long-term assets held for sale (Note 19)			—				736,125
		$	68,981,545			$	59,422,361
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	8,499,812			$	6,644,600
Accrued expenses			2,344,419				2,424,147
Accrued salaries and other compensation			2,589,877				1,982,559
Current maturities of long-term debt (Note 6)			5,192,108				4,152,908
Current maturities of convertible subordinated notes, net of debt discount of $1,847,853 (Note 7)			652,147				—
Current maturities of subordinated notes, net of debt discount of $868,345 (Note 8)			891,655				—
Dividends payable (Notes 9 and 10C)			34,562				177,996
Total current liabilities			20,204,580				15,382,210
Long-term debt (Note 6)			19,970,099				17,296,125
Convertible subordinated notes, net of debt discount of $1,565,187 and $5,443,879 (Note 7)			3,434,813				2,056,121
Subordinated notes, net of debt discount of $512,350 (Note 8)			2,787,650				—
Warrant liability (Note 8)			1,347,217				—
Total long-term liabilities			27,539,779				19,352,246
Commitments and contingencies (Notes 3,6,7,9,11 and 15)			—				—
Mandatorily redeemable convertible preferred stock (Note 9)			—				4,709,921
Stockholders’ equity
Preferred stock (aggregate liquidation preference $2,330,000 and $2,330,000, $1 par, 7,500,000 shares authorized (Note 10) Series H Junior Participating (none outstanding)			—				—
Series J (233 shares outstanding) (Note 10C)			233				233
Total preferred stock			233				233
Common stock: $0.10 par; 75,000,000 shares authorized: 31,893,200 and 30,060,690 shares issued (Notes 4,5,7,9,10 and 11)			3,189,320				3,006,069
Stock subscription (Note 10B)			(412,500	)			(412,500	)
Additional paid-in capital			121,934,658				120,197,937
Accumulated deficit			(103,252,279	)			(101,968,452	)
Accumulated other comprehensive income			2,262,895				1,639,838
Treasury stock, at cost: 523,662 common shares			(2,485,141	)			(2,485,141	)
Total stockholders’ equity			21,237,186				19,977,984
		$	68,981,545			$	59,422,361

See accompanying notes to consolidated financial statements

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25

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36