| COMPANY PROFILE
HearUSA, Inc. (www.HearUSA.com
headquartered in West Palm Beach, Florida, is the third largest retail provider of
audiological products and services for the hearing impaired in North America.
Through a network of 156 company-owned hearing care centers in eleven states and one
Canadian province, and a nationwide group of 1,400 credentialed audiology
practitioners, the Company sold over $70 million-worth of hearing care products and
services in 2003 to members of a variety of managed care organizations, as well as
retail self-pay patients. The Company offers a wide selection of high-quality
products sourced predominantly from the world's leading manufacturers, including
Siemens Hearing Instruments, Inc., which in return provides the Company with a $55
million long-term financing facility on favorable terms. The Company is the only
major hearing care provider in the U.S. approved by the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO), essential to secure exclusive
managed care contracts in many states. As life expectancy continues to rise and
environmental noise becomes increasingly harmful, hearing care is gaining interest
from medical benefits providers and even politicians, who recently introduced a tax
credit bill for hearing aid devices in both houses of Congress. Trading on AMEX
under the symbol EAR, the Company is strategically positioned to take advantage of
an already $2.8 billion industry that is on a verge of transforming an optional
luxury remedy into an essential medical care item.
| PRODUCTS AND SERVICES
The Company offers hearing care products and services through 156 centers in Florida, New York,
New Jersey, Massachusetts, Ohio, Michigan, Wisconsin, Minnesota, Missouri, Washington, California
and the Province of Ontario, Canada, and a network of approximately 1,400 affiliated audiology practitioners
in 49 states. Last fiscal year, the Company sold over 45,000 hearing aids through its outlets.
The Company's 60 original HEARx centers are located in New York, New Jersey and Florida.
An additional 22 HEARx West centers operate in Southern California under a joint venture with the Permanente
Federation LLC, an affiliate of Kaiser Permanente. The Company also runs 74 smaller HearUSA centers acquired
in 2002 from Montreal-based Helix Hearing Care of America Corp. (Helix) with significant presence in the U.S.
Each center is staffed by one to three licensed and credentialed audiologists or hearing instrument
specialists and at least one patient care coordinator. In total, the Company currently employs 186 licensed
hearing professionals, including 139 audiologists and 47 licensed hearing aid specialists. The majority of the
Company's centers are conveniently located in shopping or medical centers. The centers are typically 1,000
- 2,500 square feet in size, with an aggregate total of 286 examining rooms.
The services offered at the Company's centers include comprehensive hearing testing, interactive hearing aid
selection and fitting, aural rehabilitation and follow-up care, as well as a full range of diagnostic
audiovestibular testing in selected markets. Utilizing the Company's wide area network linking all
company-owned locations with the corporate office, the Company's proprietary Center Management System (CMS)
designed to manage patient information and to process point-of-sale customer transactions also provides
standardized referring physician reporting and other communications. In addition, the CMS data can be accessed
by the Company's national call center to directly schedule appointments. The consolidated data repository is a
valuable asset, which should help the Company grow revenues and develop new customers.
The centers offer a complete range of quality fully digital, digitally programmable and conventional hearing
aids, including all custom (In-the-Ear, In-the-Canal, and Completely-in-the-Canal) and Behind-the-Ear styles
(BTE), as well as latest technological features, such as directional microphones. While the centers may order
hearing aids from any reputable manufacturer like Phonak, Oticon, Starkey, Sonic Innovation or Unitron,
the majority of the devices sold by the Company are sourced from Siemens Hearing Instruments, Inc., the world's
largest hearing aid manufacturer, and its subsidiaries, Rexton, Inc. and Electone, Inc. Having well over a
century of technological leadership in the field, Siemens manufactures one of every five hearing aids sold in
the world today. The centers also offer a large selection of assistive listening devices, such as telephone and
television amplifiers, telecaptioners and decoders, pocket talkers, specially adapted telephones, alarm clocks,
doorbells and fire alarms, as well as other products related to hearing care like hearing aid batteries.
The Company supports the largest independent audiology network in the U.S., the HearUSA
Hearing Care Network, formerly known as the National Ear Care Plan (NECP), which provides it with valuable
1,400 additional service locations in 49 states. Such nationwide presence allows the Company to service
national contracts with institutional buyers for the referral of patients relating to the provision of hearing
care products and services, offering benefits in areas outside of the company-owned center markets. These
institutions include various health maintenance organizations (HMOs), preferred provider organizations (PPOs),
health insurers, benefit administrators and healthcare providers.
Although each network practitioner operates independently, they form a service group participating in selected
benefit programs with employer groups, health insurers and other benefit sponsors, contracted and administered
by the Company. At the same time, the network forms a potential stable buying group for private label hearing
products from the Company. To ensure compliance with its hearing benefit programs, the Company performs annual
credential verification on each of the network providers.
The Company also offers its hearing product selection on-line, at its www.HearUSA.com
, along with information about hearing loss, as well as products and services
provided by hearing health care professionals intended to educate the public and generate referrals for its
centers and network providers.
Hearing loss is one of the most common health problems affecting older adults. In the U.S., one in three
people over 60 and half of those over 85 years old are hearing impaired, yielding mostly to a condition
known as presbycusis slowly as they age. However, hearing loss also increasingly affects younger
individuals, with one out of twelve 30-year-olds and one in eight 50-year-olds suffering from hearing
loss. Due to increased exposure to excessively loud noise prevalent in modern day society, which can
often cause ringing, hissing, or roaring sounds in the ears called tinnitus, 15% of current college
graduates have a hearing loss equivalent to their parents, while construction workers age 25 on average
have a hearing loss equivalent to individuals 50 years old. In general, according to widely accepted
statistics, approximately 10% of the industrialized nations' populations are hearing impaired. In the U.S.,
28 million people currently need hearing assistance. By 2015, the World Council on Hearing Health estimates
that 33 million Americans and 700 million people worldwide will have some form of hearing loss.
Every year, according to Self Help for Hard of Hearing People, the nation's largest assistance
organization, approximately 1.3 million Americans purchase 2 million hearing aids. However the market is
far from saturated by any standard. According to MarkeTrak, the largest national consumer survey on hearing
loss, out of the 28 million individuals currently affected by hearing loss, less than 6.4 million, or 23%,
wear hearing aids, despite the fact that anywhere from 85 to 95% could greatly benefit from their use. The
group of diagnosed non-users includes 1 million children under the age of 18. Furthermore, although 66% of
all patients require devices for both ears, many currently use only one.
In addition to deeper market penetration, the trend of ever-increasing life expectancy is expected to drive
a steady fast-pace growth of the audiological care industry that has already reached $2.8 billion per
annum. With the U.S. Census Bureau predicting the Medicare age population to surge from 38 to 65 million
over the next 15 years, the demand for hearing products and services will rise accordingly. At the same
time, escalating noise-related hearing damage accompanied by a lessening stigma associated with wearing
hearing aids already contributed to a drop of the average age of first-time wearers from 78 to 68 over the
Despite these overwhelmingly favorable demographics, the largest impact on extending market penetration and
accelerating growth of the hearing care industry may lie in improving affordability. While technology
enhancements and decrease in size of hearing aids steadily increase the average unit price, a Department
of Commerce study estimates the overall family income of people with hearing loss at about half that of the
general population. Moreover, MarkeTrak indicates that 40% of affected individuals have incomes of less
than $30,000 per year. Inevitably, after a long-lasting lack of hearing aid coverage by Medicare or the
vast majority of state mandated benefits, 30% of those with hearing loss cite financial constrains as the
core reason they do not acquire hearing aids.
In 1995, a study in the International Journal of Pediatric Otorhinolaryngology estimated that overall
lifetime costs in special education, lost wages and health complications per hearing impaired person
amounts to $1 million. Concurrently, Medicare HMOs had slowly begun adding hearing aid benefits since
mid-1990s, marking a shift that is rapidly gaining momentum today. Although still more than 66% of all
hearing aid purchases involve no third-party payments and the pay-out, where present, is roughly 1/3 of
the cost, there is a quickly growing concern on the part of managed care organizations and politicians to
accommodate the needs of their aging members and constituents, respectively. The new Medicare Prescription
Drug Improvement and Modernization Act signed into law by President Bush last December gives Medicare HMOs
$4.3 billion per year for three years to reduce costs and improve benefits for seniors, potentially
including hearing aid services. Medicare payments to HMOs and other private health plans, which have
risen only about 2% annually in the recent years, will grow 10.6% in 2004. As managed care organizations
compete for Medicare members in order to take advantage of a prescription drug benefit program starting
under this law in January 2006, the total Medicare HMO membership is expected to grow substantially over
the next two years from the current 4.6 million individuals.
At the same time, politicians are designing other cost-saving initiatives catering to hearing impaired.
Last October, Rep. Jim Ryun (R-KS) introduced the Hearing Aid Assistance Tax Credit Act into the House of
Representatives. The proposed bill, already enjoying a bipartisan support of 53 congressmen and women,
would provide a tax credit of up to $500 per device for individuals over 55 or dependents under 18 once
every 5 years. Recently, the proposed bill was referred to the House Ways and Means Committee, and could
possibly be consolidated into future tax legislation. In the Senate, an identical bill was introduced by
Sen. Norm Coleman (R-MN) and has support from two senators. In addition, legislators in at least 14
states, including California, Connecticut, Hawaii, Illinois, Indiana, Louisiana, Maine, Minnesota,
Missouri, New Jersey, New York, Rhode Island, Virginia and Washington, introduced legislation to mandate
hearing aid coverage by health insurers or providing tax benefits to hearing aid users. Combined with the
demographic trends, the emerging perception of hearing care as an affordable and essential medical
treatment is anticipated to quadruple the $2.8 billion U.S. market over the next 10-15 years by some
Meanwhile, the Hearing Industries Association, an active advocacy group, reported 12% industry growth in
the second quarter of this year and the expectations for the near future are robust. According to the
second annual Audiology Online (www.audiologyonline.com) survey done in association with the leading trade
publication reaching more than 22,000 hearing professionals, The Hearing Journal, and reported in its July
issue, that more than 70% of hearing aid dispensers expect their own practices to grow in 2004, and over a
quarter anticipate their hearing aid sales will increase by better than 10%.
The Company's strategy for increasing market penetration includes positioning itself as the leading
source of hearing care to healthcare providers, advertising to the non-insured self-pay market and
increasing awareness of physicians about hearing care services and products in the Company's geographic
markets. The approach is centered upon securing contracts with managed care companies, employer groups,
health insurers, benefit sponsors, senior citizen buying groups and unions. Supporting this strategy is the
Company's preferred provider organization status granted by the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO), the only such accreditation among its major competitors in the U.S.
Although at this time only the 82 centers doing business as HEARx and HEARx West are accredited, the
Company's long-term goal is to accredit all company-owned centers, as well as interested network providers.
Through its HEARx and HEARx West centers, the Company currently services over 170 healthcare provider
agreements with organizations like Kaiser Permanente, Blue Cross/Blue Shield of New York and New Jersey,
CarePlus and Humana. The arrangements provide the Company with a base of over 1.1 million patients covered
by capitated contracts, amounting to approximately 40% of its total revenues. Catalyzed by the new Medicare
bill, the anticipated upsurge of Medicare members switching to managed care is likely to drive the
Company's monthly revenue from its contracted HMOs without increasing overhead or marketing costs. At the
same time, the Company is positioned to attract additional managed care business from Medicare HMOs, which
are expanding or just starting their hearing care benefits. Finally, the acquisition of Helix Hearing Care
of America Corp., which approximately doubled the number of company-owned locations and added the NECP
network, provided the Company with potential additional markets, some of which meet the Medicare managed
care guidelines of offering patients point-of-service access every 20 miles or every 20 minutes, at a
Having fully integrated the Helix acquisition, the Company is also preparing to fully exploit its NECP
network outside of its center markets for referral business, charging the network providers administrative
fees for referred patients. In February, the Company announced a new Veterans Administration (VA) contract
from the Department of Veterans Affairs, covering VA centers in southern Georgia, Florida and parts of
Texas. The stipulated pilot program for patient testing, hearing aid fitting and after-care services that
began in March is estimated to provide over $1 million annually in 'fee for service' revenue and positions
the Company as a testing center for the remaining ten VA regions nationwide, as well as other future
agreements with hospitals or other healthcare organizations.
In order to promote itself to the retail self-pay market, the Company regularly promotes different product
offerings, differentiates itself from competition and emphasizes the need to seek help for hearing loss to
both patients and physicians by placing print ads in its markets, organizing direct mail campaigns to its
proprietary database of targeted customers and telemarketing through its inbound and outbound national call
Lastly, the key to the Company's strategy is its relationship with its dominant supplier, Siemens Hearing
Instruments, Inc., a subsidiary of Siemens Medical Solutions, which is a division of Siemens AG based in
Munich, Germany. As the world's leading hearing aid manufacturer, Siemens offers the Company a
state-of-the-art product line supported by a large research and development budget, as well as uninterrupted
adequate supply of products. Furthermore, through a secured credit agreement signed in 2001 and subsequently
amended last year, Siemens is providing the Company with a financing facility of up to $55.4 million,
affording the Company significant flexibility and resources for strategic acquisitions, as they may occur.
In addition, subject to fulfilling the Company's obligation to purchase a certain minimum percentage of its
hearing aid products from Siemens, the Company receives preferred pricing reductions, which are applied
against the quarterly payments of certain principal and related interest amounts. The outstanding balance
on the Siemens credit facility as of March 27, 2004 was $22.0 million, of which some $8 million may be
extinguished based on fulfilling certain purchase requirements over the next several years.
The hearing care industry is extremely fragmented with approximately 9,000 independent practitioners
offering hearing care products and services in the U.S. Although most of the market is penetrated by
small independent providers, there are a number of significant market players, including two larger than
the Company. The largest hearing care provider is Amplifon USA, Inc. (Amplifon), a subsidiary of Amplifon
S.p.A. (Italian Stock Exchange: AMP), operating (i) over 1,000 Miracle-EarŪ franchise locations nationwide
with 400 of them in Sears stores, (ii) 87 company-owned Sonus centers throughout the U.S. and Canada and
a network of 1,500 affiliated members, as well as (iii) 50 National Hearing Centers located mostly at
WalMart stores. Next most formidable competitor is Beltone Electronics Corp., a hearing aid manufacturer
owned by GN (Great Nordic) Store Nord A/S (Copenhagen Stock Exchange: GN) that distributes its products
primarily through a national network of approximately 600 authorized distributors in the United States and
Canada. The Company also faces competition from large discount retailers, such as Costco, which present a
competitive threat in selected markets, as well as companies offering similar network services, including
HearingPlanet, Inc. (Hearingplanet.com) with over 1,000 locations nationwide, Avada owned by Hearing
Healthcare Management, Inc. and American Hearing Aid Associates, Inc. (AHAA) with minority interest owned
by William Demant Holding A/S (Copenhagen Stock Exchange: WDH), another hearing aid manufacturer. Finally,
the Company competes less directly with primarily online distributors of over-the-counter hearing aids, such
as Crystal Care International, Inc. at www.crystalear.com
and Songbird Hearing, Inc. at
, which offers disposable hearing aids. However, Company distinguishes itself with
its impressive brand name franchise and its JCAHO accreditation.
The Company's management team has a wealth of proven entrepreneurial skills, strong medical, operational and
financial backgrounds, and nearly fifty years of combined experience in the hearing aid industry. Paul A.
Brown, M.D., the Company's Chairman of the Board of Directors, is a renowned pioneer of the clinical
laboratory testing industry and an accomplished business leader with well over three decades of executive
experience. Prior to founding the Company in 1986, Dr. Brown in 1967 founded MetPath, Inc., a clinical
laboratory services company subsequently sold to Corning Incorporated (NYSE: GLW) for $140 million in 1982,
later spun-off and currently known as Quest Diagnostics, Inc. (NYSE: DGX). Dr. Brown holds an A.B. from
Harvard College and an M.D. from Tufts University School of Medicine, where he was formerly Chairman of the
Board of Overseers of Tufts University School of Medicine. He is also an Emeritus member of the Board of
Trustees of Tufts University, a part-time lecturer in pathology at Columbia University College of Physicians
and Surgeons and a past member of the Visiting Committee of Boston University School of Medicine.
The Company's Chief Executive Officer, Stephen J. Hansbrough, has over two decades of executive experience in
healthcare and other retail operations. While working as the Senior Vice President of Dart Group Corporation,
he was instrumental in starting affiliated group of companies, Crown Books Corporation and Trak Auto
Corporation, all public entities, which subsequently had over 400 locations combined, generated approximately
$550 million in annual revenues and employed over 3,000 people. Mr. Hansbrough was later Chairman and CEO of
Dart Drug Stores with annual revenues in excess of $250 million. Prior to joining the Company in 1993, Mr.
Hansbrough was an independent consultant specializing in turnaround and start-up operations, primarily in the
Gino Chouinard, the Company's Chief Financial Officer, is a Chartered Accountant with five years of
experience as a Senior Accountant and Manager at Ernst & Young LLP. Prior to joining the Company in 2002,
Mr. Chouinard served as Chief Financial Officer at Helix Hearing Care of America Corp. from 1999 until its
acquisition by the Company. Mr. Chouinard received a Certificate in Business Law from the University of
Montreal in 1997.
Donna L. Taylor, Senior Vice President Sales and Operations, has worked for the Company since 1987, starting
as an audiologist and subsequently progressing through operational roles to her current position. 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 Certificate of Clinical Competency in 1982.
| FINANCIAL OUTLOOK AND SUMMARY
Following the Helix acquisition in mid-2002, the Company's net revenues rose 23% to $70.5 million for the
fiscal year ended December 31, 2003, from $57.2 million in 2002. The net loss decreased from $7.6 million,
or $0.34 per share, in 2002, to $1.7 million, or $0.06 per share, for the 2003 year, (including $1.9 million
of non-cash charges). In 2003, the Company reached first ever positive income from operations of $1.9
million, compared to a loss from operations of $4.5 million in 2002.
For the first quarter ended March 31, 2004, the Company reported net revenues of $16.9 million, compared to
$17.4 million for the comparable period last year. The 3% decrease in revenue was attributable to special
contract revenue and a balance of undelivered hearing aids at the beginning of the quarter from last year
totaling $1.5 million. The net loss for the first quarter of 2004 was $1.6 million, or $.05 per share,
compared to a net income of $201,000, or $.01 per share, in the prior year.
Continuing to expand efforts to improve its cost structure, the Company is pursuing its strategy to increase
sales through internal marketing to self-pay customers, managed care organizations contracts and potential
strategic acquisitions. Based on a guiding statement released by the Company, the revenues for the quarter
ended June 26, 2004 are expected to be approximately $18.2 million, an increase of almost 8% over the $16.9
million reported for the first quarter of this fiscal year. Further accelerating growth could become even
more apparent in the second half of the 2004 and the 2005 fiscal years, when new contracts recently signed
with additional healthcare providers become active. As the competition for the growing senior citizen sector
intensifies and more managed care companies begin offering increasing hearing care benefits, the Company,
which currently reports 85% of its purchases from the Medicare age group, is likely to further improve its
top line. Serving 1.1 million insurance patients under capitated contracts already, the Company expects to
greatly increase its stronghold position in the Medicare HMO market, where the member population is projected
to surge over the next years. In addition, the Company could significantly increase its retail sales to
self-paying individuals, if the proposed hearing aid tax credit bill is eventually passed by Congress.
Finally, taking advantage of the favorable credit conditions from Siemens, the Company could consummate
acquisitions to increase its customer base, albeit increasing the $22 million debt balance currently
outstanding with Siemens. With a profit margin on hearing aids sales of about 50%, after subtracting 33%
cost of goods sold, 6% marketing costs, 7% professional commissions and 4% miscellaneous expenses, the
Company's breakeven point appears to be at a level of about $19.5 million per quarter. Given ongoing
marketing programs and further cost cutting underway, the Company could return to profitability in 2005.
Additional revenue growth may also materialize as the Company strengthens its relationship with the NECP
network providers. Favorable progress on the Veterans Administration pilot contract holds promise for
expansion of geographical coverage to the remaining ten VA regions nationwide, multiplying the referral
revenue potential. Furthermore, the Company plans to initiate a full-scale private label products program
offered through its network. Considering that independent audiology providers sell nationally on average 20
units per month, the Company's 1,400-member network could provide another fairly significant source of
revenue in the form of a mark-up margin.
The company clearly has great upside potential as a takeover candidate, and could be an impressive target
to a large manufacturer of hearing aids, a large specialty retailer or a drugstore company, or a foreign
conglomerate wishing access to the North American market, the largest outlet for hearing aid products. The
consolidation trend within the U.S. hearing aid industry has been gaining momentum for several years. In
2000, Beltone Electronics Corp. was acquired by Great Nordic. After establishing its U.S. presence by
purchasing the Miracle EarŪ brand in 1999, in October 2002 Amplifon acquired Sonus Corp., which in fiscal
year 2001 reported revenues of $48.9 million and negative EBITDA of $1.5 million, for $38.4 million.
Subsequently, in August 2003, Amplifon bought National Hearing Centers, Inc. with revenues of approximately
$17 million for $15 million.
The HearUSA experienced management team has proven its ability to manage the Company's growth, the
consolidation trends within the industry, and implement cost control programs, during the past twelve
months, and is well prepared to meet its goals of achieving meaningful profitability during 2005 and
beyond. Assuming the management team is successful in building shareholder value by achieving meaningful
profitability, the Company will then be much better positioned to eventually become acquired at a
significant premium price by a strategic buyer. A growing revenue stream will enhance shareholder value.
The Company's shares have already attracted institutional interest, with several funds owning approximately
20% of the outstanding common shares, as of March 31, 2004. The institutional ownership of shares appears to
have resulted in recent volatility of the shares, as some have acquired or sold shares into the marketplace.
Any further net institutional buying would be a positive development that could enhance the overall value of
the shares. As such, the EAR shares present an excellent opportunity for speculative investors willing to
accept the general high risks associated with emerging growth companies, such as the lack of liquidity and
price volatility, as well as intense competition within the industry, continued losses, significant goodwill,
high debt levels accompanied by interest burden, current working capital deficit, and expected dilution, as
subsequent financing is undertaken.
At the current price levels, the Company's market capitalization of approximately $42 million represents
less than 60% of the fiscal 2003 revenues. Given the industry benchmarks, the Company's current revenue
base and near-term earnings potential appears to justify a significantly higher valuation, not taking into
consideration any of the intangible value of its brand name franchise, the exclusive JCAHO accreditation,
the fiscal stability provided by Siemens and the recent effective cost containment efforts that could soon
lead to profitability, upon reaching revenues in excess of $80 million in the fiscal year 2005. In
conclusion, assuming that the Company demonstrates meaningful revenue growth over the next several quarters,
and returns to profitability, the shares can perhaps return to levels achieved in the marketplace earlier in
Alan Stone, Managing Director
The information presented in this report is not to be construed as an offer to sell, nor a solicitation of an offer to purchase, any securities referred to herein or otherwise. The information contained in this report is based entirely on information available to the public and has been obtained from the company featured herein, as well as other sources, in each case without independent verification. The information featured herein is considered reliable, but cannot be guaranteed as to accuracy or completeness. The information includes certain forward-looking statements within the meaning of Section 21E of the SEC Act of 1934, which may be affected by unforeseen circumstances or certain risks. The reader is hereby advised to review all SEC filings for a more complete description of the Company's business, including the financial statements and all risk factors set forth therein. By accepting and reading this report, the reader hereby acknowledges that neither WallStreet Research, nor any other affiliate thereof (including without limitation, Alan Stone & Company LLC, to which the company featured herein paid a consulting fee of $7,000 in conjunction with preparation and distribution of this report, of which $5,000 will be paid prior to distribution) makes any representation, either express or implied, as to the accuracy, completeness, fitness for a particular purpose or future results, of any statement contained herein. Neither WallStreet Research, nor any of its officers, agents or affiliates, accepts any liability whatsoever for any statements made herein, including without limitation any liability for direct, consequential or special damages of any kind or nature. Any securities mentioned herein may be deemed speculative, and not appropriate or suitable for all investors, and anyone reading this report is advised to discuss its contents with their investment advisors. The nature of the information contained in this report is considered time sensitive, is subject to change without notice, and cannot be relied upon after a period of three months, unless updated. Alan Stone & Company, LLC, which has entered into a consulting agreement with the Company, may be entitled to earn future fees from research report updates or other possible consulting services. Alan Stone & Company LLC may own shares, for investment purposes, in its corporate accounts, and may increase or decrease its positions at any time, without notice.
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