Read This and Weep: Unraveling HearUSA, part 13

HearUSA showed a profit in each year from 2001 to 2003 based on the aggregate individual office production and expenses.  HearUSA could have started retiring some of its debt.  Instead, with HEARx management now firmly holding HearUSA reins, executive compensation{{1}}[[1]]At least $1.29 million for the top four offices in 2003. For that year,  Dr. Brown and Mr. Hansbrough had respective base salaries $240 & $250K and total compensation of $440,00 and $5000,00, respectively[[1]]; compensation to Board members and  vice presidents; and other Central Office expenses ran “general and administrative expenses” up over $11 million on the 2003 report.  Debt interest consumed another $1.7 million.  As a result, HearUSA emerged from its second year with revenues of $57-59 million (depending on where you read it {{2}}[[2]]SEC Form 10-K Annual report, HearUSA, Inc., filed December 27, 2003. [[2]]) on operating costs of $64 million, with a net loss of $7.5million and $22 million in long term debt.

As described last week, the Board composition was stacked by what insiders describe as “Friends of Dr Brown” (FODBs) as HearUSA moved into 2004.  High compensation to top management can be laid at the door of the Board and–by extension–to FODBs{{3}}[[3]] “Executive pay is an important part of corporate governance, and is often determined by a company’s board of directors.”[[3]] In 2003, a busy Board extended 5-year employment contracts to Dr. Brown and Mr. Hansbrough;  granted a number of stock options to itself, employees, and consultants; and approved a stock bonus plan to “incentivize seven senior management personnel.”{{4}}[[4]]C.f. pages 55 and 68 of SEC Form 10-K Annual report, HearUSA, Inc., filed December 27, 2003.[[4]].

Second tier central management included some FODBs and contributed to general operating costs.  For instance, one contributor was a weird relative known to me only as the “guy in charge of Corporate Movement in New York. ”  Per one insider, this guy was a FODB who was awarded around $100,000 annual salary for his tough job in 2003. But here’s the thing — there were never any corporate moves in New York. If nothing else, this certainly speaks to Dr. Brown’s loyalty to his friends, or perhaps to his commitment to long-term planning.

Did I mention that HearUSA was a publicly traded company but most of the stock was in the hands of insiders, same as the HEARx MO?   Did I mention they were still unprofitable and still owed Siemens money? In fact, they negotiated another Siemens loan (Tranche E, $3.5 million) in 2003.  Did I mention that HearUSA was selling short-term notes at high interest rates and long-term warrants at preferred share prices to its own directors?{{5}}[[5]]In 2003, HearUSA “completed a private placement of $2 million of unsecured notes with a number of investors, including three of HearUSAs directors. The one-year notes bear interest at a rate of 15% for the first six months and 18% for the second. The financing also included seven-year warrants, which cannot be exercised during the first two years, to purchase a total of 720,000 shares of common stock. The outside lenders warrants are at a price of $1.25 per share, while the participating directors warrants are priced at $1.31 per share.”[[5]] For all I know, the interest rates and share prices were competitive for the times.  Maybe everything was fine, but I’m just sayin’… No wonder Hansbrough and Brown were no longer inclined to retire!{{6}}[[6]]Dr Brown and Stephen Hansbrough stayed at Hear USA until 2008 and 2011 respectively.[[6]]

So, it was business as usual, but on a bigger scale.  Hear USA stayed in the red and continued to borrow and do reverse stock splits, just as HEARx had.  None of which prevented the megavision from moving forward, taking others with it.  Here’s the HearUSA spin machine in action:

Stephen Hansbrough, chief executive officer, noted, we believe the increased revenues and the success of our cost-control efforts have positioned HearUSA to continue to post improved year-over-year results. In addition to the benefits of the Helix acquisition, we continue to pursue acquisitions of smaller hearing care providers in our existing markets.

And here are some reactions from the markets :

After a decade of losses, one trader, Roth Capital, rates HearUSA as a “strong buy” and sets a target share price of $3/share, compared to current share price of $1.45, based on the “fragmented hearing aid market” and expected rapid expansion as a result of acquiring Helix.

In August 2004, a Wall Street research firm singled out HearUSA for inclusion in its “coverage of emerging growth companies with strong management, unique or proprietary technology, significant market potential, financial strength, and outstanding long-term earnings growth possibilities.”

How’d that go?  As you might expect, HearUSA continued to take in large revenues but run up more in expenses.  Contrary to Hansbrough’s comments, HearUSA offices actually fell from 2003 to 2005 (158 to 136) and there were far fewer acquisitions in this decade than anticipated.

Roth Capital bought high and probably sold low.  The stock opened on the Amex at $0.30 on January 1, 2003 and closed at $0.27 that day on a volume ot 1,054,100. Back to the future, where the stock opened at $0.31 in May of this year and closed at $0.15 on trading volume of 8,363,650.  No need to beat a dead horse, so we’ll move to events of 2008 and thereafter as we work hard to finish this series.

Photo courtesy of blingcheese