HearUSA, Inc. (EAR-AMEX)
2005 Interview with:
Paul A. Brown, M.D., Founder and Chairman
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
156 hearing care centers in the U.S and and the province of Ontario Canada and network of 1,400 affiliated audiologists in 49 states.

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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”

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Healthcare Services
Services Retail

HearUSA, Inc.

1250 North Point Parkway
Palm Beach, FL 33407

Phone: 561-478-8770

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.

Company Profile:
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 HearUSA’s website www.hearusa.com.

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…cash in the bank,…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 us more?
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 custom made.”

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 customers…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…so 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 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 future.”

CEOCFO: In closing, would you like to say anything about the positive aspects of being a service-oriented business?
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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“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.” - Paul A. Brown, M.D.


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