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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

Commission file number 0-16453

HearUSA, Inc.

Registrant’s Telephone Number, Including Area Code

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

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

     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. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    o         No þ

     As of June 28, 2003, 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 $14,945,729.

     On March 12, 2004, 30,423,636 shares of the Registrant’s common stock were outstanding, including 1,166,041 of exchangeable shares.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant’s definitive Proxy Statement for the 2004 Annual Meeting of the Registrant’s Stockholders (“2004 Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III hereof.

PART I

Item 1.     Business

      HearUSA, Inc. (“HearUSA” or the “Company”) has a network of 156 company-owned hearing care centers (the “centers”) in 11 states and the Province of Ontario, Canada. The Company also sponsors approximately 1,400 credentialed audiology providers (the “network providers” or the “network”) that participate in selected hearing benefit programs contracted by the company with employer groups, health insurers and benefit sponsors in 49 states. The centers and the network providers provide audiological products and services for the hearing impaired.

      HearUSA seeks to increase market share and market penetration in its center and network markets through creative marketing and an organized delivery system that targets the medical and consumer communities. HearUSA will also look for acquisitions in its center markets. The Company’s strategy for increasing market penetration includes advertising to the non-insured self-pay market, positioning itself as the leading provider of hearing care to healthcare providers and increasing awareness of physicians about hearing care services and products in the Company’s geographic markets. The Company believes it is well positioned to successfully address the concerns of access, quality and cost for the patients of managed care and other health insurance companies, diagnostic needs of referring physicians and, ultimately, the hearing health needs of the public in general.

      HearUSA was incorporated in Delaware on April 11, 1986, under the name HEARx Ltd., and formed HEARx West LLC; a fifty-percent owned joint venture with Kaiser Permanente, in 1998. In July of 2002, the Company acquired Helix Hearing Care of America Corp. (“Helix”) and changed its name from HEARx Ltd. to HearUSA, Inc.

2003 Developments

      On March 14, 2003, the Company obtained an additional $3,500,000 secured five-year term loan from Siemens Hearing Instruments, Inc. (“Siemens”) (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. See “Business — Siemens Hearing Instruments Inc.,” below. Proceeds of this financing have been used mainly for working capital purposes.

      On July 15, 2003, because of the complexity of the Quebec legislation governing the provision of hearing care, the Company sold 100% of the shares of the Company’s three subsidiaries and selected assets associated with the management of the centers located in the Canadian Province of Quebec. The Quebec subsidiaries and selected assets had been acquired by the Company as part of the Helix acquisition in July 2002. The sale was made to Forget & Sauve, Audioprothesistes, S.E.N.C. (“Forget & Sauve”) and 6068065 Canada Inc., private entities owned and controlled by Steve Forget, a former Company and Helix officer and director. See Notes 12 and 18, Notes to Consolidated Financial Statements, included herein.

      On August 27, 2003, the Company exchanged all 4,563 outstanding shares of its 1998 Convertible Preferred Stock for 4,563 shares of the newly designated E Series Convertible Preferred Stock (“E Convertible Preferred Stock”). All E Series Convertible Preferred Stock not converted or redeemed by December 18, 2006 must be redeemed by the Company on December 18, 2006. The old 1998 Convertible Preferred Stock was scheduled to convert by its terms into common stock on August 27, 2003. As part of the transaction, the Company has agreed that accrued but unpaid premiums on the 1998 Convertible Preferred Stock and the 10% premium on the E Series Convertible Preferred Stock will be paid in cash each month beginning in November 2003 and continuing until December 2006. The holders have agreed that they will not convert the preferred stock prior to November 1, 2005, except in certain circumstances. See Note 8 and Note 9E, Notes to Consolidated Financial Statements, included herein.

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      On October 3, 2003, the Company completed an interim financing in the form of a private placement of $2 million in unsecured notes and common stock purchase warrants with a number of investors, including three members of the Company’s board of directors. Proceeds from the financing were used to pay Siemens under the supply agreement. As of December 27, 2003, these notes were fully repaid using proceeds from the December 19, 2003 financing described below. Only the warrants remain outstanding. See Note 7, Notes to Consolidated Financial Statements, included herein.

      On December 19, 2003, the Company completed a private placement of $7.5 million of five-year convertible subordinated notes with five-year common stock purchase warrants. Proceeds from this financing were used to repay the $2 million notes issued on October 3, 2003 and for working capital purposes. The Company used approximately $1.8 million of the net proceeds to pay Siemens under the credit agreement in January 2004. See Note 7, Notes to Consolidated Financial Statements, included herein.

Siemens Hearing Instruments, Inc.

      In 2001, the Company entered into a credit agreement with Siemens. The credit agreement provides for a $51,875,000 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). As described above, Siemens and the Company amended the credit agreement in March 2003 to add a $3,500,000 secured five-year term loan facility (the Tranche E Loan), increasing the secured credit facility to $55,375,000. As of December 27, 2003 all of the Tranches were drawn upon, available funds under the Tranche B at the end of 2003 were approximately $24.9 million.

      In connection with the credit facility, HearUSA and Siemens entered into a supply agreement, pursuant to which HearUSA agreed to purchase from Siemens certain minimum percentages of the HearUSA centers’ hearing aid purchases for a period of ten years (an initial five year term and a five year renewal term) at specified prices. As long as the Company purchases, on a cumulative basis, the certain minimum percentage requirement under the supply agreement, preferred pricing reductions are received from Siemens and applied against the quarterly payments of principal and related interest due on Tranches A, B and C.

Facilities and Services

      Each HearUSA center is staffed by a licensed and credentialed audiologist or hearing instrument specialist and at least one patient care coordinator. Experienced audiologists supervise clinical operations. The majority of the Company’s centers are conveniently located in shopping or medical centers, and the centers are typically 1,000 — 2,500 square feet in size (1,000 — 2,000 for the Helix centers and 2,000 — 2,500 for the HEARx and HEARx West centers). The Company has a total of 286 examining rooms. The Company’s goal is to have all centers similar in design, exterior marking and signage, because a uniform appearance reinforces the message of consistent service and quality of care.

      Each center provides hearing services that meet or exceed applicable state and federal standards, including:

	•	Comprehensive hearing testing using standardized practice guidelines
	•	Interactive hearing aid selection and fitting process
	•	Aural rehabilitation and follow up care
	•	Standardized reporting and physician communications

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      In some markets, a full range of audiovestibular testing is also available to aid in the diagnosis of medical and vestibular disorders.

      Each network provider operates independently from the Company. However, to ensure compliance with its hearing benefit programs, the Company performs annual credential verification on each of the network providers to ensure they meet the minimum criteria to be part of the network. Also, on a random basis, the Company performs patient surveys on the quality of their services.

Products

      HearUSA’s centers offer a complete range of quality hearing aids, with emphasis on the latest digital technology. While the centers may order a hearing aid from any manufacturer, it is likely the majority of the hearing aids sold by the centers will be manufactured by Siemens and its subsidiaries, Rexton and Electone. The centers also sell hearing aids manufactured by Phonak, Oticon, Starkey, Sonic Innovation and Unitron.

      HearUSA centers also offer a large selection of assistive listening devices and other products related to hearing care. Assistive listening devices are household and personal technology products designed to assist the hearing impaired in day-to-day living, including such devices as telephones and television amplifiers, telecaptioners and decoders, pocket talkers, specially adapted telephones, alarm clocks, doorbells and fire alarms.

      The network providers also provide hearing aids, assistive listening devices and other products related to hearing care. Although some of the providers sell hearing aids manufactured by Siemens and its subsidiaries, Rexton and Electone, they have no commitment such as the Company does to purchase their products from Siemens.

Managed Care and Institutional Contracts

      Since the beginning of 1991, the Company has entered into arrangements with institutional buyers relating to the provision of hearing care products and services. HearUSA believes that contractual relationships with institutional buyers of hearing aids are essential. These institutions include managed care companies, employer groups, health insurers, benefit sponsors, senior citizen buying groups and unions. By developing contractual arrangements for the referral of patients, marketing costs are reduced and relationships with local area physicians are enhanced. Critical to providing care to members of these groups are the availability of distribution sites, quality control and standardization of products and services. The Company believes its system of high quality, uniform company-owned centers meets the needs of the patients and their hearing benefit providers and that the network providers can expand available distribution sites for these patients

      HearUSA usually enters into provider agreements with hearing benefit providers for the furnishing of hearing care on three different bases: (a) discount arrangement based on a contractual rate offered by the centers and/or the network providers to hearing benefit provider’s members (all paid for by the patient); (b) an encounter fee for service basis where the centers and/or the network providers are paid a contracted fee by the hearing benefit provider for each hearing aid sold (with the balance paid by the individual member); or (c) a per capita basis, which is a fixed payment per member per month from the hearing benefit provider to HearUSA, determined by the benefit offered to the patient and the number of patients (the balance, if necessary, is paid by the individual member). When involving the network providers, HearUSA reimburses them a portion of the per-member-per-month payment, net of administration fees.

      The terms of most of these provider agreements are renegotiated annually, and most of these agreements may be terminated by either party on 90-days notice. The early termination of or failure to renew the agreements could adversely affect the operation of the hearing care centers located in the related market area. In addition, the early termination of or failure to renew the agreements that provide for payment to the Company on a per capita basis would cause the Company to lower its

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      The Company and its subsidiary HEARx West LLC (“HEARx West”), a joint venture with Permanente Federation LLC (an affiliate of Kaiser Permanente), currently receive a per-member-per-month fee for more than 1.1 million managed care members. In total, HearUSA services over 268 benefit programs for hearing care with various health maintenance organizations preferred provider organizations, insurers, benefit administrators, and healthcare providers.

Marketing and Revenues

      HearUSA’s marketing plan for its centers focuses on:

	•	Newspaper and Special Events: HearUSA places print ads in its markets promoting different hearing aids at a variety of technology levels and prices along with special limited time events. Advertising also emphasizes the need to seek help for hearing loss as well as the qualitative differences and advantages offered by HearUSA.
	•	Direct Marketing: Utilizing HearUSA’s database, HearUSA makes direct mailings and offers free seminars in its markets on hearing and hearing loss.
	•	Physician Marketing: HearUSA attempts to educate both physicians and their patients on the need for regular hearing testing and the importance of hearing aids and other assistive listening devices. HearUSA works to further its image as a provider of highly professional services, quality products, and comprehensive post-sale consumer education.
	•	Telemarketing: HearUSA has a domestic national call center, which supports all HearUSA centers. The national call center is responsible for both inbound and outbound telemarketing.

      For the fiscal years 2003, 2002 and 2001, HearUSA revenues were $70,545,154, $57,230,128, and $48,796,110, respectively. During 2003, 2002 and 2001, the Company did not have revenues totaling 10% or more of total net revenues from a single customer.

Segments

Centers

      At the end of 2003, the company-owned a total of 156 centers located in Florida, New York, New Jersey, Massachusetts, Ohio, Michigan, Wisconsin, Minnesota, Missouri, Washington, California and the Province of Ontario, Canada. These centers offer people with hearing loss a complete range of services and products, including diagnostic audiological testing, the latest technology in hearing aids and assistive listening devices to improve their quality of life. These centers include the centers acquired in 2002 when the Company acquired Helix Hearing Care of America Corp.

      Through HEARx West, LLC, the joint venture with the Permanente Federation LLC (an affiliate of Kaiser Permanente), the Company operates a network of retail centers bearing the HEARx name to serve the needs of the hearing impaired principally in California. HearUSA is responsible for the daily operation of the centers. All clinical and quality issues are the responsibility of a joint committee comprised of HearUSA and Kaiser Permanente clinicians. HEARx West centers concentrate on providing hearing aids and audiology testing to Kaiser Permanente’s members and self-pay patients in the state of California. At the end of 2003, HearUSA operated 20 full-time and 2 part-time HEARx West centers in southern California, which are included in the 156 centers described above.

      Under the terms of the joint venture agreement, HEARx West has the right of first refusal for any new HearUSA centers in southern California; Atlanta, Georgia; Hawaii; Denver, Colorado; Portland, Oregon; Cleveland, Ohio; Washington, DC and Baltimore, Maryland. In addition, should

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Network

      The Company also sponsors a network of approximately 1,400 credentialed audiology providers that support hearing benefit programs with employer groups, health insurers and benefit sponsors in 49 states. This network, called HearUSA Hearing Care Network, was created early in 2001 with the participation of Siemens and grew significantly in July of 2002 with the acquisition of Helix which had acquired, with the help of the Company, 100% of the shares of Auxiliary Health Benefit Corporation doing business as National Ear Care Plan (“NECP”). NECP and its 1,400 credentialed audiology providers are now part of the HearUSA network.

      Unlike the company-owned centers, the network is comprised of hearing care practices owned by independent audiologists. Through the network, the Company is now in a position to pursue national hearing care contracts and offer managed hearing benefits in areas outside of the company-owned center markets. The network’s revenues are mainly derived from administrative fees paid by employer groups, health insurers and benefit sponsors to administer their benefit programs as well as maintaining an affiliated provider network and from royalties paid by Siemens for each Siemens unit purchased by a participating provider.

E-commerce

      The Company offers on-line information about hearing loss, hearing aids, assistive listening devices and the services offered by hearing health care professionals. The Company’s web site also offers on-line purchases of hearing related products, such as batteries, hearing aid accessories and assistive listening devices. In addition to on-line product sales, e-commerce operations are also designed as a marketing tool to inform the public and generate referrals for centers and for network providers.

      Financial information regarding our three business segments and financial information by geographic area are provided in Note 19, Notes to the Consolidated Financial Statements included herein.

Distinguishing Features

      Integral to the success of HearUSA’s strategy is increased awareness of the impact of hearing loss and the medical necessity of treatment, in addition to the strengthening of consumer confidence and the differentiation of HearUSA from other hearing care providers. To this end, the Company has taken the following unique steps:

Joint Commission on Accreditation of Healthcare Organizations

      During 1998, the Company distinguished itself as an accredited healthcare organization when it earned a three-year accreditation by the Joint Commission. The Company was re-accredited in 2002 as a preferred provider organization in hearing care, demonstrating its willingness to provide safe, high quality care and to be measured against high standards of performance. Accreditation means that the Company volunteered to undergo a comprehensive evaluation by a team of physicians and nurses, who personally conducted a review to assess provider credentialing, training and orientation, patient rights and care, organizational leadership and ethics, management of information, and performance improvement. Although at this time only the 82 Company centers doing business as HEARx are accredited, the Company’s long-term goal is to accredit all company-owned centers as well as interested network providers.

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Center Management System, Medical Reporting and HearUSA Data Link

      The Company has developed a proprietary center management and data system called the Center Management System (“CMS”). CMS primarily has two functions: to manage patient information and to process point-of-sale customer transactions. The CMS system is operated over a wide area network (installed in 2001) that links all locations with the corporate office. The Company is developing further capabilities for the wide area network. This system is only used in the company-owned centers.

      The Company’s corporate system is fully integrated with CMS to provide additional benefits and functionality that can be better supported centrally. Data redundancy is built into the system architecture as data is currently stored both at the regional facilities and at the central facility. The consolidated data repository is constructed to support revenues in excess of $550 million, to accommodate 500+ unique business units and to manage 500,000 new patients annually.

      One of the outputs of CMS is a computerized reporting system that provides referring physicians the test results and recommended action for every patient examined by HearUSA staff. To the Company’s knowledge, no other dispenser or audiologist presently offers any referring physician similar documentation. Consistent with the Company’s mission of making hearing care a medical necessity, this reporting system makes hearing a part of the individual’s health profile, and increases awareness of hearing conditions in the medical community. Another unique aspect of CMS is its data mining capability which allows for targeted marketing to its customer base. The national call center also has the ability to access the CMS system and can directly schedule appointments.

Competition

      The U.S. hearing care industry is highly fragmented with approximately 11,000 practitioners providing hearing care products and services. Surveys by Hearing Review in June 2001 indicate that over 60% of the hearing aids are sold by audiologists.

      In the Canadian Province of Ontario, the traditional hearing instrument distribution system is made up of small independent practices where associations are limited to two or three centers. Most centers are relatively small and are located in medical centers, professional centers or in small shopping centers.

      It is difficult to determine the precise number of the Company’s competitors in every market where it has operations, or the percentage of market share enjoyed by the Company. Some competitors are large distributors, including: (1) Amplifon of Italy, which owns a national network of approximately 1,000 franchised stores (Miracle Ear) including 400 located in Sears Roebuck & Co. stores and approximately 250 company owned centers operating in British Columbia and the United States under the Sonus name; and (2) Beltone Electronics Corp., a hearing aid manufacturer owned by Great Nordic that distributes its products primarily through a national network of approximately 600 “authorized” distributors in the United States and Canada. Large discount retailers, such as Costco, also sell hearing aids and present a competitive threat in selected HearUSA markets. All of these networks are owned by companies having greater resources than HearUSA, and there can be no assurance that one or more of these competitors will not expand and/or change their operations to capture the market targeted by HearUSA.

      The Company’s network business will also face competition by companies offering similar network services, including Hearingplanet.com, AVADA and AHAA (minority interest owned by William Demant, a hearing aid manufacturer) and the Sonus Network/ HearPO owned by Amplifon. These companies attempt to aggregate demand for hearing products and sell marketing and other services to network participants. In addition, some of these networks are able to offer discounts to managed care payors, insurers and membership organizations. Many independent hearing care providers belong to more than one network. In addition, contract terms for membership are typically

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Reliance on Manufacturers

      The Company’s supply agreement with Siemens requires that a certain portion of the company-owned center’s sales will be of Siemens devices. According to a 1998 survey, Siemens was the world’s largest manufacturer of hearing devices, producing 21% of the units sold in the world market. Siemens has a well-diversified product line (including Rexton and Electone) with a large budget devoted to research and development. However, there is no guaranty that Siemens’ technology or product line will remain desirable in the marketplace. Furthermore, if Siemens’ manufacturing capacity cannot keep pace with the demand of HearUSA and other customers, HearUSA’s business may be adversely affected.

      In the event of a disruption of supply from Siemens or another of the Company’s current suppliers, the Company believes it could obtain comparable products from other manufacturers. Few manufacturers offer dramatic product differentiation. HearUSA has not experienced any significant disruptions in supply in the past.

Qualified Hearing Professionals

      The Company currently employs 186 licensed hearing professionals, of which 139 are audiologists and 47 are licensed hearing aid specialists. The inability of the Company to attract and retain qualified licensed hearing professionals would reduce the Company’s ability to distinguish itself from competing networks of hearing aid retailers and thus adversely affect its business. The Company believes that it will be able to attract and retain qualified licensed hearing professionals sufficient to staff its centers for the foreseeable future.

Regulation

Federal

      The practice of audiology and the dispensing of hearing aids are not presently regulated on the Federal level in the United States. The United States Food and Drug Administration (“FDA”) is responsible for monitoring the hearing care industry. The FDA requires that first time hearing aid purchasers receive medical clearance from a physician prior to purchase; however, patients may sign a waiver in lieu of a physician’s examination. The FDA has mandated that states adopt a return policy for consumers offering them the right to return their products, generally within 30 days. HearUSA offers all its customers a full 30-day return period and extends the return period to 60 days for patients who participate in the family hearing counseling program. FDA regulations require hearing aid dispensers to provide customers with certain warnings and statements regarding the use of hearing aids. Also, the FDA requires hearing aid dispensers to review instructional manuals for hearing aids with patients before the hearing aid is purchased.

      In addition, a portion of the Company’s revenues come from participation in Medicare and Medicaid programs. Federal laws prohibit the payment of remuneration in order to receive or induce the referral of Medicare or Medicaid patients, or in return for the sale of goods or services to Medicare or Medicaid patients. Furthermore, Federal law limits physicians and other healthcare providers from referring patients to providers of certain designated services in which they have a financial interest. HearUSA believes that none of its managed care or other provider contracts or its relationship with referring physicians is violative of these Federal laws.

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      The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) requires the use of uniform electronic data transmission standards for health care claims and payment transactions submitted or received electronically. On August 17, 2000, the Department of Health and Human Services (“HHS”) published final regulations establishing electronic data transmission standards that all health care providers must use when submitting or receiving certain health care transactions electronically. Compliance with these regulations was required by October 16, 2002. In addition, HIPAA required HHS to adopt standards to protect the security and privacy of health-related information. Final regulations containing privacy standards became effective on April 14, 2003 and HearUSA believes it has taken the necessary steps to be in full compliance with these regulations. The privacy regulations regulate the use and disclosure of individually identifiable health-related information, whether communicated electronically, on paper or orally. The regulation also provides patients with significant new rights related to controlling how their health information is utilized or disclosed. The Company cannot predict the impact these regulations will have on its operations.

      The Federal Trade Commission (FTC) issued the amended Telemarketing Sales Rule on January 29, 2003. Like the original Telemarketing Sales Rule issued in 1995, the amended rule gives effect to the Telemarketing and Consumer Fraud and Abuse Prevention Act. This legislation gives the FTC and state attorneys general law enforcement tools to combat telemarketing fraud, give consumers added privacy protections and defenses against unscrupulous telemarketers, and help consumers tell the difference between fraudulent and legitimate telemarketing. One significant amendment to the Telemarketing Sales Rule is inclusion of a prohibition on calling consumers who have put their telephone numbers on the national “Do Not Call” registry unless one of several exceptions is applicable to the call or to the consumer. Other FTC guidelines pertinent to the Company involve professional business practices relating to issues such as transmitting the caller’s telephone number on caller id, abandoning calls and speaking to consumers in a non-professional manner. The Company adheres to policies set forth by the FTC, and has established policies and procedures to ensure its compliance with FTC regulations and with the requirements relating to the national “Do Not Call” registry.

      The CAN-SPAM Act of 2003 regulates commercial electronic mail on a nationwide basis. It imposes certain requirements on senders of commercial electronic mail. The Company adheres to the law by properly representing the nature of its commercial email messages in the subject line and provides opt in and opt out alternatives for the consumer. At any time a consumer may request exclusion from the Company’s list and the name will be deleted from the list in one business day.

      The Company cannot predict the effect of future changes in federal laws, including changes that may result from proposals for federal health care reform legislation being considered by the U.S. Congress, or the impact that changes in existing federal laws or in the interpretation of those laws might have on the Company. The Company believes it is in material compliance with all existing federal regulatory requirements.

State

      Generally, state regulations of the hearing care industry, where they exist, are concerned primarily with the formal licensure of audiologists and those who dispense hearing aids and with practices and procedures involving the fitting and dispensing of hearing aids. There can be no assurance that regulations do not exist in jurisdictions in which the Company plans to open centers or will not be promulgated in states in which the Company currently operates centers which may have a material adverse effect upon the Company. Such regulations might include more stringent licensure requirements for dispensers of hearing aids, inspections of centers for the dispensing of hearing aids and the regulation of advertising by dispensers of hearing aids. The Company knows of no current or proposed state regulations with which it, as currently operated, could not comply.

      State regulation may include the oversight of the Company’s advertising and marketing practices as a provider of hearing aid dispensing services. The Company’s advertisements and

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      The Company employs licensed audiologists and hearing aid dispensers. Under the regulatory framework of certain states, business corporations are not able to employ audiologists or offer hearing services. California has such a law, restricting the employment of audiologists to professional corporations owned by audiologists or similar licensees. The Company believes, however, that because the State of California’s Department of Consumer Affairs has indicated that speech-language pathologists may be employed by business corporations, the Company may employee audiologists. The similarity of speech-language pathology to audiology, and the fact that speech-language pathologists and audiologists are regulated under similar statutes and regulations, leads the Company to believe that business corporations and similar entities may employ audiologists. No assurance can be given that the Company’s interpretation of California’s laws will be found to be in compliance with laws and regulations governing the corporate practice of audiology or, if its activities are not in compliance, that the legal structure of the Company’s California operations can be modified to permit compliance.

      In addition, state laws prohibit any remuneration for referrals, similar to Federal laws discussed above. Generally, these laws follow the federal statues described above. HearUSA cannot predict the impact that these regulations will have on operations.

      The Company believes it is in material compliance with all applicable state regulatory requirements. However, the Company cannot predict future state legislation which may affect its operations in the states in which it does business. Nor can the Company assure that existing interpretations of state law remain consistent with the Company’s understanding of the state law as reflected through its operations.

Canada

      Laws and regulations for the Province of Ontario, Canada are concerned primarily with the formal licensure of audiologists and dispensers who dispense hearing aids and with practices and procedures involving the fitting and dispensing of hearing aids. All Ontario audiologists must be members of the College of Audiologists and Speech and Language Pathologists of Ontario and hearing aid dispensers practicing in Ontario must be members of the Association of Hearing Instrument Practitioners. Both audiologists and hearing instrument practitioners are governed by a professional code of conduct. There can be no assurance that regulations will not be promulgated in the Province of Ontario which may have a material adverse effect upon the Company. Such regulations might include more stringent licensure requirements for dispensers of hearing aids, inspections of centers for the dispensing of hearing aids and the regulation of advertising by dispensers of hearing aids. The Company knows of no current or proposed Ontario regulations with which it, as currently operated, could not comply. The Company employs licensed audiologists and hearing aid dispensers in the Province of Ontario.

      Ontario regulation and code of conducts of audiologists and hearing instrument practitioners may include the oversight of the Company’s advertising and marketing practices as a provider of hearing aid dispensing services. The Company’s advertisements and other business promotions may be found to be in violation of these regulations from time to time, and may result in fines or other sanctions, including the prohibition of certain marketing programs that may ultimately harm financial performance.

      In addition, Ontario regulation and code of conducts of audiologists and hearing instrument practitioners prohibit any remuneration for referrals.

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Product and Professional Liability

      In the ordinary course of its business, HearUSA may be subject to product and professional liability claims alleging the failure of, or adverse effects claimed to have been caused by, products sold or services provided by the Company. The Company maintains insurance at a level which the Company believes to be adequate. A successful claim in excess of the policy limits of the Company’s liability insurance, however, could adversely affect the Company. As the distributor of products manufactured by others, the Company believes it would properly have recourse against the manufacturer in the event of a product liability claim; however, there can be no assurance that recourse against a manufacturer by the Company would be successful or that any manufacturer will maintain adequate insurance or otherwise be able to pay such liability.

Seasonality

      The Company is subject to regional seasonality the impact of which is minimal.

Employees

      At December 27, 2003, HearUSA had 462 full-time employees and 43 part-time employees, of which 81 were employed by HEARx West.

Where to Find More Information

      The Company makes information available free of charge on its website (www.hearusa.com). Through the website, interested persons can access the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K after such material is electronically filed with the SEC.

Item 2.     Properties

      HearUSA’s corporate offices and national call center are located in 19,600 square feet of space in West Palm Beach, Florida. The leases on these properties are for five years and expire in 2006. As of December 27, 2003, the Company operated 31 centers in Florida, 15 in New Jersey, 15 in New York, 9 in Massachusetts, 8 in Ohio, 8 in Michigan, 2 in Wisconsin, 6 in Minnesota, 8 in Missouri, 14 in Washington and 22 HEARx West centers in California. HearUSA also operates 18 centers in the Province of Ontario. All of the locations are leased for one to ten year terms pursuant to generally non-cancelable leases (with renewal options in some cases). Each center consists of between 200 and 4,000 square feet with annual base rents ranging from approximately $4,000 to $104,000. The Company believes these locations are suitable to serve its patients’ needs. The network is operated from an office located in Denver, Colorado (head office of NECP at the time of its acquisition). The lease for this location expires in December 2004. The Company has no interest or involvement in the network providers properties or leases. The e-commerce business is operated from the Company’s corporate office in West Palm Beach.

Item 3.     Legal Proceedings

      The Company has from time to time been a party to lawsuits and claims arising in the normal course of business. In the opinion of management, there are no pending claims or litigation, in which the outcome would have a material effect on the Company’s consolidated financial position or results of operations.

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Item 4.     Submission of Matters to a Vote of Security Holders

      None

EXECUTIVE OFFICERS OF THE COMPANY

      The following sets forth certain information as of the date hereof with respect to the Company’s executive officers. Each of Dr. Brown and Mr. Hansbrough are serving pursuant to employment agreements, renewed in 2003, with 5-year terms expiring in 2008 unless renewed or extended. Mr. Chouinard and Ms. Taylor each has been appointed to a term that will expire at the earlier of the annual meeting of Board of Directors held at the time of the 2004 Annual Meeting of Stockholders, or their resignation or removal:

      There are no family relationships among any of the executive officers and directors of the Company.

      Paul A. Brown, M.D., holds an A.B. from Harvard College and an M.D. from Tufts University School of Medicine. Dr. Brown founded HearUSA in 1986 and has served as Chairman of the Board since that time and Chief Executive Officer until July 2002. From 1970 to 1984, Dr. Brown was Chairman of the Board and Chief Executive Officer of MetPath Inc. (“MetPath”), a New Jersey-based corporation offering a full range of clinical laboratory services to physicians and hospitals, which he founded in 1967 while a resident in pathology at Columbia Presbyterian Medical Center in New York City. MetPath developed into the largest clinical laboratory in the world with over 3,000 employees and was listed on the American Stock Exchange prior to being sold to Corning in 1982 for $140 million. Dr. Brown is formerly Chairman of the Board of Overseers of Tufts University School of Medicine, an Emeritus member of the Board of Trustees of Tufts University, a past member of the Visiting Committee of Boston University School of Medicine and part-time lecturer in pathology at Columbia University College of Physicians and Surgeons.

      Stephen J. Hansbrough, Chief Executive Officer and Director, was formerly the Senior Vice President of Dart Drug Corporation and was instrumental in starting their affiliated group of companies (Crown Books and Trak Auto). These companies along with Dart Drug Stores had over 400 retail locations, generated approximately $550 million in annual revenues and employed over 3,000 people. Mr. Hansbrough subsequently became Chairman and CEO of Dart Drug Stores with annual revenues in excess of $250 million. After leaving Dart, Mr. Hansbrough was an independent consultant specializing in turnaround and start-up operations, primarily in the retail field, until he joined HearUSA in December 1993.

      Gino Chouinard, Chief Financial Officer, joined HearUSA in July 2002 with its acquisition of Helix. Mr. Chouinard served as Helix’s Chief Financial Officer from November 1999 until its acquisition by HearUSA. Mr. Chouinard is a Chartered Accountant who previously worked for Ernst & Young LLP, an international accounting firm, as Manager from 1996 – 1999 and as Senior

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      Donna L. Taylor, Senior Vice President Sales and Operations, joined HearUSA in July 1987 as an audiologist. She was later promoted to Area Manager and Director of Operations for the Company in Florida. She assumed her role as Vice President Sales and Operations in December 1993 and in October 2000 was promoted to Senior Vice President — Sales and Operations. Ms. Taylor received her B.S. from the University of Iowa in May 1979, her M.A. from the University of Iowa in May 1981, and earned her CCC (Certificate of Clinical Competency) in March 1982.

PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

      The common stock of the Company is traded on the American Stock Exchange (AMEX) under the symbol “EAR” and the exchangeable shares of HEARx Canada Inc. are traded on the Toronto Stock Exchange under the symbol “HUX.” Holders of exchangeable shares may tender their holdings for common stock on a one-for-one basis at any time. As of March 12, 2004, the Company had 30,423,626 shares of common stock outstanding, including 1,166,041 exchangeable shares. The closing price on March 12, 2004 was $2.41 for the common stock and canadian $3.15 for the exchangeable shares. The following table sets forth the high and low sales prices for the common stock as reported by the AMEX for the fiscal quarters indicated:

      As of March 12, 2004, there were 1,603 holders of record of the common stock.

Dividend Policy

      HearUSA has never paid and does not anticipate paying any dividends on the common stock in the foreseeable future but intends to retain any earnings for use in the Company’s business operations.

Recent Sales of Unregistered Securities

      On October 3, 2003, the Company completed an interim financing in the form of a private placement of $2 million in unsecured convertible notes and common stock purchase warrants with a number of accredited investors, including three members of the Company’s board of directors. The terms of the notes included conversion to common stock in the event of a default in payment of the notes at a conversion rate of $0.75 per share. The financing included seven-year warrants, which cannot be exercised during the first two years, to purchase up to 800,000 shares of the Company’s common stock. The outside investors’ warrants have an exercise price of $1.25 per share, the quoted closing price of the common stock on the day of the financing, while the participating directors’ warrants have an exercise price of $1.31 per share. Proceeds from the financing were

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      On December 19, 2003, the Company completed a private placement of $7.5 million of five-year convertible subordinated notes with 2,642,750 five-year common stock purchase warrants to accredited investors. The notes may not be converted and warrants to purchase 2,142,750 common shares may not be exercised for a two-year period. The remaining warrants to purchase 500,000 shares are exercisable beginning in June 2005 at $1.75 per share. Beginning in December 2005, the $7.5 million notes may be converted at $1.75 per share and warrants may be exercised for up to 2,142,750 shares at $1.75 per share. Proceeds from this financing were used to repay the $2 million notes issued on October 3, 2003 and for working capital purposes. The Company used approximately $1.8 million of the net proceeds to pay Siemens under the credit agreement in January 2004. The Company relied on Section 4 (2) of the Securities Act of 1933 for the exemption from registration of this offer and sale because the offering was only to accredited investors and was conducted exclusively as a private offering and sale.

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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:

OPERATING STATEMENT DATA:

(1)	As discussed in Note 5 to the Consolidated Financial Statements, effective June 30, 2002, the Company completed its business combination with Helix.

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BALANCE SHEET DATA:

(1)	As discussed in Note 5 to the Consolidated Financial Statements, effective June 30, 2002, the Company completed its business combination with Helix.
(2)	Includes $110,890 of long-term debt of discontinued operations.

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GENERAL

      On July 11, 2002, the Company completed its acquisition of Helix. Helix owned or managed, prior to the combination, 126 hearing healthcare clinics located in Massachusetts, New York, Ohio, Michigan, Wisconsin, Minnesota, Washington and Missouri as well as in the Provinces of Ontario and Quebec. The transaction was effective for financial reporting purposes on June 30, 2002, the first day of the Company’s third quarter of 2002. In connection with the completion of the Helix combination, on July 8, 2002 the Company changed its name from HEARx Ltd. to HearUSA, Inc.. The Company’s common stock continues to trade on the American Stock Exchange under the symbol “EAR”. The exchangeable shares of HEARx Canada, Inc., the Company’s Canadian subsidiary, trade on the Toronto Stock Exchange under the symbol “HUX”.

      On July 15, 2003, the Company sold 100% of the shares of the Company’s three subsidiaries and selected assets associated with the management of the centers located in the Canadian Province of Quebec, previously acquired as part of the Helix combination. The results of the Quebec operations have been excluded from results of operations and are classified as discontinued operations in the accompanying financial statements.

      As a result of the combination with Helix and following the divestiture of the Quebec subsidiaries, the Company now has a network of 156 company-owned hearing care centers in the states of Florida, New York, New Jersey, Massachusetts, Ohio, Michigan, Wisconsin, Minnesota, Missouri, Washington and California and the Province of Ontario, Canada. The Company now has a network of approximately 1,400 credentialed audiology providers that participate in hearing benefit programs contracted by the Company with employer groups, health insurers and benefit sponsors in 49 states.

      The Company intends, as its long-term goal, to establish a nationwide network of centers and network providers. During 2003, the Company completed its integration of the Helix centers and capitalized on synergies resulting from the combination with Helix to reduce its cost structure and improve its profitability. In 2004, the Company will focus on improving its revenue per transaction and other key performance indicators, such as its conversion, return and binaural rate, while maintaining the same volume of transactions in its centers. The Company will also focus on entering more national managed care contracts in order to increase its network revenues.

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 2002 and 2003, and each of these tests

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Revenue recognition

      HearUSA recognizes revenues from the sale of audiological products at the time of delivery and revenues from hearing care services at the time those services are performed.

      The Company has capitation contracts with certain healthcare organizations under which the Company is paid an amount for each enrollee of the health maintenance organization to provide to the enrollee a once every three years discount on certain hearing products and services. The amount paid to the Company by the healthcare organization is calculated on a per-capita basis and is referred to as capitation revenue. The Company defers recognition of capitation revenue until the earlier of the actual utilization by the member populations of the benefit, or the end of the contract term.

      When the actual utilization of the benefit by the member population exceeds the amount received on a per-capita basis (over utilization), the excess is recorded as accounts receivable on the balance sheet. Usually, the hearing benefit is structured in a way that the member can use it only once every three years. In these circumstances, historical data shows that the benefit will generally be over utilized the first year, appropriately utilized the second year and under utilized the third year. The Company estimates an allowance to reduce the accounts receivable from over utilization to a level equivalent to the estimated future under utilization during the remaining term of the benefit.

Allowance for doubtful accounts

      Certain of the accounts receivable of the Company are from health insurance and managed care organizations and government agencies. These organizations could take up to nine months before paying a claim made by the Company and also impose a limit on the time the claim can be billed. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions, and a review of the current status of each 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 ageing categories is applied against the remaining receivables to estimate the new allowance. Any changes in the percent assumptions per plan and ageing categories could result in a change in the allowance for doubtful accounts. For example, an increase of 10% in the percent used would increase the allowance for doubtful accounts by approximately $30,000.

Sales returns

      The Company provides to all patients purchasing hearing aids a specific return period of at least 30 days if the patient is dissatisfied with the product. The Company provides an allowance in accrued expenses for returns. The return period can be extended to 60 days if the patient attends the Company’s H.E.L.P. program. The Company calculates its allowance for returns using estimates based upon actual historical returns. The cost of the hearing aid is reimbursed to the Company by the manufacturer if the return is made within 90 days from the time of delivery to the hearing center.

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RESULTS OF OPERATIONS

2003 Compared to 2002

      Net revenues in 2003 increased approximately $13.3 million, or 23.3%. This increase in revenues is mainly attributable to the revenues of the centers acquired in the Helix acquisition in July 2002 of approximately $10.6 million for the first six months of 2003, which were not included in the first six months of 2002. Excluding the Helix’s revenues for the first six months of 2003, the Company’s revenues increased approximately $2.7 million or 4.8%, of which approximately $382,000 is related to a change in the average Canadian exchange rate from 2002 to 2003. The remaining increase of approximately $2.4 million is mainly due to an increase of approximately 8.8% in hearing aids sold in the U.S. centers representing approximately $4.2 million in incremental revenues, offset by a decrease in the average selling price of approximately 4.3% representing approximately a $2.3 million decrease in revenues. The reduction in average selling price is mainly attributable to a different mix of promotions in 2003 compared to 2002.

      Cost of products sold in 2003 increased approximately $3.7 million, or 22.3%. The increase is the direct result of inclusion of cost of products sold at the former Helix centers of approximately $2.9 million for the first six months of 2003, which was not included in the comparable period of 2002. Excluding the Helix cost of product sold for the first six months of 2003, cost of products sold increased by approximately $740,000, or 4.5%, of which approximately $153,000 is attributable to a change in the average Canadian exchange rate from 2002 to 2003. The remaining increase of approximately $587,000 is the direct result of the increase in the number of hearing aids sold, offset by a reduction from improved product pricing the Company received as a result of the former Helix centers selling more Siemens’ products during the last six months of 2003 as compared to the same period in 2002. Included in the cost of products sold are preferred pricing reductions of approximately $3.9 million and $3.8 million for 2003 and 2002, 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 credit agreement, against the principal and interest payments due on Tranches A, B and C. The cost of products sold as a percent of net revenues was 28.5% and 28.7% for 2003 and 2002, respectively.

      Center operating expenses increased approximately $3.5 million, or 11.0%, in 2003. This increase is related to inclusion of operating expenses for the former Helix centers of approximately $5.0 million for the first six months of 2003, which were not included in the comparable period of 2002. HearUSA center operating expenses, excluding the former Helix centers for the first six months, decreased approximately $1.5 million or 4.7%, in 2003 compared to 2002, offset by a small increase due to the change in the average Canadian exchange rate. This decrease is attributable to the cost reduction and control program the Company first implemented in May 2001 and maintained throughout 2002 and 2003. In particular, the Company continued to reduce its marketing programs, reducing center advertising expense to approximately $4.2 million, or 7.1% of revenue, excluding the former Helix centers’ expenses for the first six months of 2003, in 2003, down from approximately $5.2 million or 9.1% in 2002. In addition, center wage expense and regional office costs also decreased approximately $156,000 or 1.0%, and approximately $325,000 or 17.9%, respectively.

      General and administrative expenses decreased approximately $714,000, or 6.4%, in 2003, net of an increase of approximately $30,000 due to the change in the average Canadian exchange rate. This decrease is mainly attributable to the completion of the integration of the Helix corporate overhead within the Company’s structure, at the end of 2002 and beginning of 2003, resulting in reduction of expenses of approximately $281,000 in 2003 as compared to 2002 and severance expense recorded at the end of 2002 in the amount of approximately $335,000, compared to no severance recorded at the end of 2003.

      Depreciation and amortization expense increased $495,000 or 19.6% in 2003. This increase is related to the former Helix depreciation and amortization expense for the first six months of 2003, which was not included in the comparable period of 2002, and additional amortization of certain

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      Interest income decreased $93,000, or 81.8%, in 2003. This decrease is primarily attributable to the decline in the average daily balance of cash and investments prior to the receipt of proceeds of the $7.5 million financing in December 2003.

      Interest expense increased $1.1 million or 64.2% in 2003, of which $517,000 is non-cash as explained below. This increase is attributable to Helix interest expense of approximately $289,000 for the first six months of 2003, which was not included in the comparable period of 2002, approximately $277,000 in interest on the credit facility with Siemens due to the issuance of Tranche E in March 2003, approximately $627,000 of interest on the $2 million financing done on October 3, 2003, and approximately $119,000 of interest on the $7.5 million financing done December 19, 2003. These increases were offset by a decrease of approximately $170,000 in interest on existing balances due to repayments of principal during 2003.

      The non-cash $517,000 charge included in the interest expense in 2003 is the amortization of the debt discount resulting from the proceeds allocated to the warrants to purchase 800,000 shares of the Company’s common stock issued with the $2 million financing in October 2003 of approximately $429,000 based on relative fair values, and approximately $88,000 of amortization of 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 (see Note 7 of the Notes to the Consolidated Financial Statements, included herein). These non-cash charges do not have any impact on the liquidity and working capital of the Company.

2002 Compared to 2001

      Net revenues increased $8.4 million, or 17.3%, in 2002. The increase in revenues is related to Helix revenues of approximately $11.0 million for 2002. HearUSA net revenues, excluding Helix, for 2002, decreased $2.6 million, from $48.8 million in 2001 to $46.2 million in 2002. This decrease is primarily the result of the economic downturn. Management believes that continuing economic uncertainties during 2002 were causing the Company’s primary market, the nation’s elderly population, to reduce discretionary spending.

      Cost of products sold increased $1.0 million, or 6.5%, in 2002. The increase in cost of products sold is related to Helix cost of products sold of approximately $3.4 million for 2002. HearUSA cost of products sold, excluding Helix, decreased $2.4 million in 2002 to $13.0 million in 2002 from $15.4 million in 2001. This decrease in cost of goods sold is primarily the result of the increase in preferred pricing reductions of approximately $2.1 million from $1.7 million in 2001 to $3.8 million in 2002 from Siemens for achieving certain sales levels pursuant to the supply agreement with the Company, which are accounted for as a reduction of cost of products sold for financial reporting purposes, offset by an increase in the non-hearing aid cost of goods sold, such as repairs, batteries and assistive listening devices. The preferred pricing reductions were applied by the Company, pursuant to the credit agreement, against the principal and interest payments due on Tranches A, B and C. The cost of products sold as a percent of net revenues, was 28.7% and 31.6% for 2002 and 2001, respectively.

      Center operating expenses increased $2.9 million, or 9.9%, in 2002. This increase is related to Helix center operating expenses of approximately $5.5 million for 2002. HearUSA center operating expenses, excluding Helix, decreased approximately $2.6 million in 2002 from approximately $28.7 million in 2001 to approximately $26.1 million in 2002. This decrease is attributable to the cost reduction and control program the Company first implemented in May 2001 and maintained throughout 2002. The Company reduced its marketing programs, reducing center advertising expense to $4.7 million, or 8.2% of net revenues, in 2002 down from $6.0 million, or 12.3% in 2001. In

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      General and administrative expenses increased $744,000 or 7.1%, in 2002. This increase is related to Helix’s corporate general and administration expense of approximately $512,000 in 2002. HearUSA general and administrative expenses, excluding Helix, increased $232,000 in 2002. This increase is attributable to an increase of $226,000 in telephone expenses due to the full implementation of the call center in the fourth quarter of 2001, approximately $139,000 loss on the disposition of equipment, and an increase of approximately $347,000 in professional fees. This was offset by the Company’s cost reduction program. The Company reduced its marketing programs, reducing corporate advertising $382,000 to $405,000 in 2002 compared with $787,000 in 2001. Shareholder relations expense decreased $179,000 or 44.8%, to $220,000 in 2002 from $398,000 in 2001. This decrease is primarily the result of the Company’s retention of an investment banking firm beginning in December 2000 through August 2001 to render services with respect to financial consulting and public relations. No such fees were incurred in 2002.

      Depreciation and amortization expense increased $112,000, or 4.7%, in 2002. HearUSA depreciation and amortization expenses, excluding Helix, decreased $376,000 to $2.0 million for 2002 from $2.4 million in 2001, which was primarily the result of certain equipment becoming fully depreciated during 2002. This decrease was offset by Helix’s depreciation and amortization expense of approximately $375,000 for 2002, and additional amortization of approximately $112,000 of certain intangible assets acquired in the combination.

      Interest income decreased $108,000 or 48.7%, to $114,000 in 2002 from $222,000 in 2001. This decrease is attributable to the decline in average interest rates earned primarily on cash and cash equivalents. Interest expense increased $1.1 million to $1.7 million in 2002 from $653,000 in 2001. This increase is primarily attributable to the addition of interest on the line of credit with Siemens, beginning in December 2001.

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). Tranche E Loan was obtained pursuant to an amendment to the Company’s credit agreement with Siemens and is otherwise subject to the terms and conditions of the credit agreement and related security agreement. At December 27, 2003, $5,889,000, $83,000, $2,100,000, $13,000,000 and $3,500,000, representing principal on the Tranche A, Tranche B, Tranche C, Tranche D, and Tranche E Loans, respectively, were outstanding. As of December 27, 2003, approximately $24,900,000 is available to the Company for acquisitions under Tranche B of the credit facility.

      The Tranche A, B and C Loans are payable quarterly over five years with the outstanding principal and interest at 10%, due and payable on the final maturity date. Principal and interest, at the prime rate (as defined) plus 1%, on the Tranche D Loan is payable on the final maturity date. The Company is required to make monthly payments of interest only on the Tranche E Loan in the first year. In years two through five, the Company must make monthly principal and interest payments. Quarterly principal and interest payments on the Tranche A, B and C Loans may be paid through preferred pricing reductions received from Siemens by HearUSA as long as the Company purchases certain minimum percentages of its requirements of hearing aids from Siemens. During

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      The Siemens credit facility imposes certain financial and other covenants on the Company, which are customary for loans of this size and nature, including restrictions on the conduct of the Company’s business, the occurrence of indebtedness, merger or sale of assets, the modification of material agreements, changes in capital structure, making certain payments and paying dividends. If the Company cannot maintain compliance with these covenants, Siemens may terminate future funding under the credit facility and declare all then outstanding amounts under the facility immediately due and payable. Also, the Company’s supply agreement with Siemens requires full payment for hearing aids purchased from Siemens within 60 days from statement date. As of December 27, 2003, the Company was in compliance with those payment provisions. Upon noncompliance, Siemens may declare the Company to be in default of the supply agreement by written notification, which, if not cured within 60 days of the date of written notification, would be an event of default under the Company’s credit facility with Siemens and Siemens would have the right to declare all amounts outstanding under the credit facility immediately due and payable. Any non-compliance with the supply agreement could have a material adverse effect on the Company’s financial condition and continued operations.

      During 2003, working capital increased $7.9 million to a negative $2.3 million as of December 27, 2003 from a negative $10.2 million as of December 28, 2002. This is mainly the result of the additional $3.5 million financing the Company received from Siemens in March 2003 and the $7.5 million of new convertible subordinated notes issued in December 2003, offset by an increase of $2.4 million of current maturities of long-term debt mainly related to the current portion of the Siemens Tranches D and E. The working capital of negative $2.3 million includes approximately $2.9 million representing the current portion of the long-term debt to Siemens for Tranche A, B and C, which may be repaid through preferred pricing reductions. In 2003, the Company generated income from operations of approximately $1.9 million compared to a loss of $4.5 million in 2002 and cash and cash equivalents as of December 27, 2003 was approximately $6.7 million.

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

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      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 27, 2003.

Payments Due by Period

(1)	Approximately $8.1 million (Tranches A, B and C) can be repaid through preferred pricing reductions from Siemens, including $2.9 million in less than 1 year, $4.9 million in years 1 – 3 and $300,000 in years 4 – 5.
(2)	Interest on long-term debt excludes $1,158,000 of accrued but unpaid interest on Tranche D presented with long-term debt in (1) above. In addition, approximately $1.3 million of interest on Tranches A, B and C can be repaid through preferred pricing reductions from Siemens.
(3)	These notes and corresponding interest can be repaid at the option of the Company in common stock at the time payment becomes due. (See Note 7 — Notes to the Consolidated Financial Statements, included herein.)
(4)	Includes approximately $365,000 of the 8% premium payable upon redemption in December 2006, of which $37,000 has been accreted as of December 27, 2003.

      Also, the Company expects using a range of $150,000 to $700,000 in cash in 2004 to replace existing computers and equipment as well as for center relocations upon lease expirations.

2003 Compared to 2002

      The Company used approximately $4.8 million of cash in operating activities in 2003 compared approximately $1.8 million in 2002. This decrease is primarily the result of an increase in accounts receivable, inventories and prepaid expenses and other of approximately $750,000 in 2003, compared to a decrease of approximately $1.5 million in 2002, and a decrease in accounts payable and accrued expenses and accrued salaries and other compensation of approximately $4.9 million,

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      In 2003, the Company generated approximately $1.4 million of cash from investing activities compared to cash used of approximately $12.8 million in 2002. The cash provided by investing activities in 2003 is mainly attributable to the proceeds from the sale of discontinued operations of the Quebec subsidiaries of approximately $1.9 million, offset by cash used for purchase of property and equipment of approximately $260,000 and business acquisitions of approximately $252,000. The change from 2002 is attributed to the cash used in the Helix transactions in that particular year of $8.4 million for issuance of a note receivable and the advance to Helix pre-combination, net of cash acquired of $1.2 million, the purchase of pre-combination investment in Helix of $2.0 million and the cost of the business combination of $1.6 million.

      Net cash provided by financing activities decreased from approximately $11.6 million in 2002 to approximately $7.8 million in 2003. The cash generated by financing activities in 2003 is attributable to the $3.5 million financing from Siemens in March of 2003, the $7.0 million received in connection with the $7.5 million financing done in December of 2003 ($500,000 of this financing was received in January of 2004) and the $2.0 million financing in October of 2003, offset by repayments of principal on long-term debt of approximately $1.2 million, repayment of the October 2003 $2.0 million financing, payment of dividends on preferred stock of approximately $1.1 million, and issuance costs of the financing of approximately $266,000. The decrease of cash provided by financing activities over 2002 is primarily attributable to lower proceeds from issuance of long-term debt and capital stock. During 2003 and 2002, $2.9 million and $3.1 million, respectively, of preferred pricing reductions were applied against principal payments due on Tranches A, B and C. These payments, being non-cash, were not presented as principal repayments on long-term debt in the consolidated statements of cash flows.

2002 Compared to 2001

      Net cash used by operating activities decreased from $5.0 million in 2001, to $1.8 million in 2002. The decrease in net cash used in operating activities was primarily the result of a decrease in net loss from continuing operations between periods of approximately $1.9 million, a net decrease in the change in accounts receivable, inventories and prepaid expenses of approximately $167,000 and an increase in the change in accounts payable and accrued expenses and accrued salaries and other compensation of the periods of approximately $2.8 million.

      Net cash used by investing activities increased from $2.5 million in 2001, to $12.8 million in 2002. In 2002, purchases of investment securities in excess of proceeds were approximately $285,000 compared to proceeds from investment securities in excess of purchases of maturities of investments of approximately $843,000 in 2001. Purchases of property and equipment decreased approximately $1.2 million. Cash used to fund a note receivable and advances to Helix prior to the combination as of June 30, 2002 totaled approximately $8.4 million, net of cash acquired in the combination with Helix of approximately $1.2 million. Cash used to purchase a common stock investment in Helix prior to the combination totaled $2.0 million. Costs incurred for the Helix acquisition during 2002 were approximately $1.6 million, compared to approximately $977,000 in 2001.

      Net cash provided by financing activities increased from $8.8 million in 2001 to $11.6 million in 2002. This increase is primarily the result of the net proceeds of $13.0 million from the Siemens Tranche D Loan and $1.5 million from the 2002 private placement of common stock, offset by approximately $1.8 million in repayments of long-term debt and approximately $1.0 million of preferred stock dividends paid in cash, compared to net proceeds of the $7.5 million Siemens Tranche A Loan received in 2001. During 2002 and 2001, $3.1 million and $0, respectively, of

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RECENT ACCOUNTING PRONOUNCEMENTS

      In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit (including restructuring) or disposal activities at fair value when the related liability is incurred rather than at the date of a commitment to an exit or disposal plan under current practice. Costs covered by the standard include certain contract termination costs, certain employee termination benefits and other costs to consolidate or close facilities and relocate employees that are associated with an exit activity or disposal of long-lived assets. The new requirements are effective prospectively for exit or disposal activities initiated after December 31, 2002. As of the Company’s adoption of SFAS No. 146 on January 1, 2003 all exit and disposal activities are accounted for and disclosed in accordance with SFAS No. 146.

      In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others” (FIN 45). FIN 45 elaborates on the disclosures that a guarantor should make in its interim and annual financial statements regarding its obligations relating to the issuance of certain guarantees. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The impact of adopting FIN 45 on the Company’s financial position and results of operations was not material.

      In January 2003, the FASB issued FASB Interpretation No. 46,” Consolidation of Variable Interest Entities” (“FIN 46”), which provided guidance on how to identify variable interest entities (“VIEs”) and determine when the assets, liabilities, noncontrolling interests, and results of operations of VIEs need to be included in a company’s consolidated financial statements. FIN 46 was applicable to VIE’s created after January 31, 2003. In the original provisions of FIN 46, VIE’s created prior to February 1, 2003, were to be consolidated effective December 31, 2003. Disclosures were required currently if the Company expects to consolidate any VIE’s. In December 2003, the FASB redeliberated certain proposed modifications and revised FIN 46 to FIN 46R. The revised provisions are applicable no later than the first reporting period ending after March 15, 2004. FIN 46R did not have a material effect on the Company’s consolidated financial statements.

      Effective July 1, 2003, the Company adopted EITF Issue No. 00-21 (“EITF 00-21”), “Accounting For Revenue Arrangements with Multiple Deliverables”, which establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria considers whether the delivered item has stand-alone value to the customer, whether the fair value of each of the undeliverable items can be reliably determined and the customer’s right of return for the delivered items. The Company’s adoption of EITF 00-21 did not have an effect on its consolidated financial statements.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement did not have a material effect on its consolidated results of operations or financial position.

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Forward Looking Statements

      This Annual Report on Form 10-K and, in particular, this management discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. Any statements that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this report. The statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

      The Company does not engage in derivative transactions. The Company does become exposed to foreign currencies as a result of its operations in Canada, and the Company is not hedging such exposure. Differences in the fair value of investment securities are not material; therefore, the related market risk is not significant. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s long-term debt and convertible subordinated notes. The following table presents the Company’s financial instruments for which fair value and cash flows are subject to changing market interest rates:

Long-Term Debt and Convertible Subordinated Notes

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Item 8.     Financial Statements and Supplementary Data

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Report of Independent Certified Public Accountants

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

We have audited the accompanying consolidated balance sheets of HearUSA, Inc. as of December 27, 2003 and December 28, 2002, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 27, 2003. 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 auditing standards generally accepted in the United States of America. 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. 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 27, 2003 and December 28, 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 27, 2003 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.

BDO Seidman, LLP

West Palm Beach, Florida
March 12, 2004

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HearUSA, Inc.

See accompanying notes to consolidated financial statements

28

HearUSA, Inc.

See accompanying notes to consolidated financial statements

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HearUSA, Inc.