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HearUSA is the third
largest provider of hearing aids in the $3 billion hearing care industry, with annual
revenues approaching $80 million, cash in the bank, positive cash flow and the only U.S.
based public company in this service space
1250 North Point Parkway
West Palm Beach, FL 33407
Paul A. Brown, M.D.
Founder and Chairman
Interview conducted by:
Walter Banks, Publisher
December 15, 2005
Paul A. Brown, M.D., age 67. Dr. Brown 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. That lab is now called Quest Diagnostics (NYS-DGX) with
over $5 billion in annual revenues. 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 is currently a part-time lecturer in pathology and a member of the
Visiting Committee at Columbia University College of Physicians and Surgeons.
HearUSA provides hearing care to patients whose health insurance and managed care
organizations have contracted with the company for such care and to retail
self-pay patients. The centers are located in California, Florida, New York, New
Jersey, Massachusetts, Ohio, Michigan, Missouri and the province of Ontario Canada.
In addition, the company has a network of 1,400 affiliated audiologists in 49 states. For
additional information, click on investor information at HearUSAs
CEOCFO: Dr. Brown, your stock price does not seem to match
the interest in your company, will you tell us more about that and why you think that is?
Dr. Brown: As a real business in an existing market
with the cash to exercise the strategy and a depressed stock, we are clearly undiscovered.
If you look back on this company over the last year-and-a-half, we have had seven
consecutive quarters of increasing revenues. Excluding the non-cash charges, we were
profitable for the second half of last year and the first three quarters of this year. Our
operating profit for this year is up over 100% at the beginning of this year. Yet, our
stock is trading at less than .5 times annual revenue while an international competitor in
our space trades at approximately 2 times annual revenue. The company is doing
very well and we have millions of dollars in cash etc., but we are an undiscovered stock
trading at a fraction of the correct price. People often ask me why the stock is so cheap.
I believe it is for the following three reasons: a. it has taken us a long time to get the
business on track. The industry was retail with massive amounts of fraud and abuse while
we were trying to build a medical business in hearing care; b. because of my personal
track record of having started Quest Diagnostics, I never had any problem raising money
for the company, so we never went the traditional route of having an investment banker who
would become the company cheerleader; c. because of the success with my first company, we
peaked at 36,000 retail shareholders (1996). At this point in time, we have only about 12%
of the shares held by institutions. We must get a bigger institutional base. This stock
was $1.12 last December and peaked this year around $2.09. There are still no institutions
accumulating the shares despite the continued improving operational results. Recently, we
have had two research reports published on the company. One by Stonegate Securities, Inc.
of Dallas, Texas and one by C.E. Unterberg Towbin of New York, New York.
CEOCFO: What do you aim
to do to change that culture?
Dr. Brown: Six months ago, I began to have one-on-one
meetings with institutions. The institutions outlined the following concerns to be
resolved before they would take the position: a. prove that we could make money and we now
have! In the third quarter, we had an $88,000 loss after a $660,000 non-cash charge;
b. we had a variable priced preferred on our balance sheet, which could have resulted in
incredible dilution. In November, we eliminated that preferred with $5.5 million private
debt transaction. The final two issues were to redo or replace our agreement with Siemens
ICN (NYSE: SI), which ends in December of 2006 and lastly to eliminate the non-cash
charges. We are working diligently on both of those last two issues. I think that if we
can get those resolved, then a number of the institutions that I have spoken to in the
last six months, will move from the radar screen onto the buying scene.
CEOCFO: Do you think
that the small size of your business makes a difference to them?
Dr. Brown: We did $19.6 million in Q3. We have
announced to the shareholders that we expect to achieve 8 - 10% growth from internal
aspects of the business and have begun a strategic acquisition program, which has a target
for another 8 - 10% growth. At close to the $80 million run-rate, we are approaching the
magic $100 million number. I think that once we pass that revenue number, then we will see
many more institutions involved. Micro-cap stocks are still out of favor and there are so
many of them that we must distinguish the company to attract institutional investors. We
are in a $3 billion business in hearing care as the third largest provider in that
industry. We are a company with approximately $80 million in annual revenue
positive cash flow
and a deal with Siemens which provides a line of
credit of $25 million that we do not have to pay interest on or pay back as long as we buy
80% of our products from Siemens. This line of credit is to be used for acquisitions.
There is every reason why an investor should be purchasing our stock at this point in
time. One other company in our space operating hearing care stores who is not a vertically
integrated hearing aid manufacturer is Amplifon from Italy that trades at approximately 2
times revenue and 50 times earnings while we are trading at less than .5 times. Our
stock was $3.07 in March of 2004. It has no business being at the current price!
CEOCFO: Have you made
inroads in your quest for acquisitions?
Dr. Brown: There are approximately 9000 independent
practitioners in all of the United States. We are now operating clinics in eight states. (New
York, New Jersey, California, Florida, Michigan, Massachusetts, Ohio and Missouri). We are
interested in making acquisitions primarily in those eight states. Thirty-three percent of
all the hearing aids in the United States are sold in our eight states, so it is not
unreasonable to expect that two thousand out of the nine thousand, hearing aid providers
are in those states. Our targets are providers with approximately $500,000 or more of
annual revenues. Of those two thousand, there are approximately five hundred doing a half
a million dollars a year or more; or about a $250 million in revenue/year. The purchase
price is roughly a percentage of trailing 12-month revenues, of which we are giving them a
percentage in cash and a percentage in 3-5 year notes. When the stock is three dollars or
more, we might consider stock for some of the purchase price. The cash will come from
Siemens line of credit. We have had no problem finding interested candidates and we
believe our strategic acquisition program will be quite successful.
CEOCFO: Are you
interested in expanding your international business?
Dr. Brown: At the present time, 10% of our business is
international from Ontario province in Canada. Twenty of our approximate 140 clinics are
located in Canada. We are developing that business and intend to make acquisitions there.
That particular province is very similar to the United States from a marketing point of
view and I think we are going to concentrate just on that province.
CEOCFO: One concern is
payment structure and people being able to pay for their hearing aid costs, will you tell
Dr. Brown: About 60% of our business is derived from
insurance companies referring patients to us. The remaining 40% is from classic retail
advertising and walk-in business. From the healthcare provider patients, approximately one
third of the cost is covered while the balance is the patients responsibility at the
time of delivery. So there is not a receivable issue in this business. There is also not
an inventory in this business, since the majority of the patients hearing aids are
CEOCFO: Is there
anything that you would like to see from the government that would help your business?
Dr. Brown: Yes, there are several pieces of legislation
pending in Washington that would be exciting to see passed. First, deals with a tax credit
when purchasing hearing aids. This law would provide anybody over 55 or under 18 with a
$500 tax credit toward the purchase of up to two hearing aids every five years. The other
is legislation that would make an audiologist a healthcare professional, which would allow
the audiologist to bill for the testing directly to the Medicare program. We cannot do
that at this time as the business is bundled. When the patient buys a hearing aid, the
test is included in the purchase price of the hearing aid. If that legislation were
passed, we could in theory, begin to bill for the testing separately from the hearing aid.
So the government may help the industry grow, but so will the aging of the population and
environmental noise. A recent CNN report indicated that 25% of the adults between 30-40
using iPods more than an hour a day are developing hearing loss. Those are our
they will be running to Hear USA soon.
CEOCFO: The market
probably has been a growing market, since the day Rock-n-Roll began!
Dr. Brown: When senior citizens grew up, it was
acceptable to have something in your ear when you worked for NBC broadcasting or the
Secret Service. But, now the youth of America have had a walkman in their ear, an MP 3
player in their ear, an iPod in their ear and a cell phone in their ear for years
there is not the stigma for this group of having something in your ear. The insurance
industry has taken the position with the retirees
well let them turn the TV louder or
let them buy orchestra seats if they have trouble hearing at the theatre. However,
younger consumers who become hearing impaired are going to demand that their insurance
company covers hearing aids. Only one in five hearing aids sold in the United States has
any insurance coverage now and in the next five to ten years that is going to change
dramatically. The economic issues will work themselves out and some company in this
industry is going to be a billion dollar business.
CEOCFO: Tell us about
product improvements and as a service company, how they affect your business.
Dr. Brown: We sell predominantly Siemens products as
they are the largest manufacturer in the world of hearing aids with the best service and
quality. In addition, they are continuing to spend R & D dollars on improving
their products. I am now wearing their latest product, ACURIS LIFE. I have two of them and
they are phenomenal. The hearing aids are very light and, therefore, comfortable. They do
not block my ear canal and, therefore, I do not have distortion of my own voice or feel
like something is in my ear canal. I can talk on the telephone and hear in restaurants.
When I went into this business, I was hearing impaired and I was not happy with hearing
aids because they were not comfortable nor did they work for me. I have had this new
product now for three months, I wear two and I wear them all the time!
CEOCFO: Are you Siemens
largest customer for hearing products?
Dr. Brown: Siemens currently sells over 20% of the
hearing aids in the U.S. (or 400,000 units). Our purchases of approximately 50,000 hearing
aids per year certainly is noticed at Siemens.
CEOCFO: What do you need
to do to attract more investors?
Dr. Brown: We need additional unpaid for research
analyst coverage to attract new institutional shareholders. Millennium just took over a ¾
million share position in the company. So it is happening
it is just not happening
fast enough to suit us. Everybody would like to buy low and nobody wants to bid the price
up. I believe somebody is going to have to pay a lot more for our shares in the near
CEOCFO: In closing,
would you like to say anything about the positive aspects of being a service-oriented
Dr. Brown: I have always been a service oriented
businessman and investor. Even though you may get an incredible play in the stock in the
biotech field, very often by the time you get your stock to the vault, somebody has
already out-teched your technology. I would rather be delivering a quality and
timely service that I know I can control, than being dependent upon technology. Let
somebody else develop the technology. I would like to be the one to provide it.
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