Down Boy, Sit, Stay! Unraveling HearUSA, part 4

As last week’s post wound down, HEARx was hurtling toward  200 retail “hearing aid stores,” 14% US marketshare, and multimillion dollar profitability  by 1991. They didn’t make it.  By 1995, the company was a penny stock (NASDAQ Bulletin Board OTC: EARS) with  only 20% of the stores projected for 5 years earlier.  HEARx wasn’t nationwide and it wasn’t profitable, although top management continued to pull down good size salaries and/or take stock options exercisable over 10 years{{1}}[[1]]SEC Form 10K HEARx Annual Report. 1995.[[1]]  Worst of all, HEARx couldn’t pay its suppliers.

Faced with potential economic shutdown throughout this period, a lesser man than Chairman Brown might have despaired, quit taking salary, and shored up the company with his own money. To his credit, he did forego salary in exchange for stock options and he did contribute personal funds to cover some operating costs (see footnote 1).  In general, he exhibited an indomitable spirit in the face of disaster, staying true blue to the original marketing plan’s goals to achieve:

 “exclusive labeling [and] …long-term contractual licensing and distribution relationship(s) with selected manufacturers,” all coordinated through “sophisticated computerized data storage and retrieval system which will centrally store information compiled from each HEARx office visit, regardless of the center’s location.” {{2}}[[2]]Internal HEARx Marketing Plan, 1986.[[2]]

Accordingly, HEARx, Ltd., radiated prosperity from what  one insider describes as a “large, richly endowed central office, stocked heavily with friends of Dr Brown.”  Sequestered in the Central Office, HEARx was riding a wave of agreements and investors and issuing great PR announcements such as this breathless 1995 recap {{3}}[[3]] HEARx to provide hearing care to CAC-United healthcare patients. [[3]]

HEARx Ltd., the only public company in the one billion dollar field of hearing care, has comprehensive state-of-the-art facilities offering a full range of diagnostics and rehabilitative services. HEARx currently operates 40 company-owned centers in Florida,Virginia and Oregon. HEARx has strategic alliances with Minnesota Mining and Manufacturing (3M) as well as AARP Pharmacy Service, and managed care contracts with Av-Med, CareFlorida (Foundation Health), Florida Health Choice, Health Options (Blue Cross-Blue Shield), HIP Health Plan of Florida, Humana Health Care Plans, PacifiCare and Prudential (SeniorCare Plan).

Another industry insider has commented that Dr Brown believed in building his company using other people’s money, which may explain his sunny attitude and HEARx’s growth in the midst of financial meltdown.  It is amazing what you can do with other people’s money.  In 1991, HEARx got a cash infusion of several million dollars from 3M{{4}}[[4]] 3M Makes Equity Investment in HEARx. [[4]], in exchange for “having the Company market and distribute 3M’s hearing aid products in the US.”{{5}}[[5]] Morning Star Document Research, For, SC 13D. 3M Co – HEARQ. Filed. June 6 1996[[5]]. HEARx became the exclusive dispenser of 3M products in its territories in June 1993.  The future looked rosey, though I don’t think 3M was in thrall of the glamorous Central Office down in Florida or all of the Friends of Dr Brown.  In a Letter of Agreement dated, 11/19/93, 3M made it clear that HEARx had to man up:

HEARx shall immediately implement cost reduction programs … shall provide to 3M an operational plan of this strategy and action…. for aggressive implementation of more than $1million in annualized cost reduction….  HEARx shall hire an experienced, retail person (previously identified) to be given the responsibility and authority to implement the cost reduction programs and strengthen the operational linkage to 3M.

Nothing went well.  By 1995, HEARx had lost its exclusive dispenser arrangement with 3M, which was bailing out of the hearing aid business entirely and trying to get its seed money back from HEARx, along with all the product payables HEARx owed. But Dr. Brown worked his magic in 1996 when HEARx went on the American Stock Exchange, (AMEX: EAR). 3M assumed an equity position for 15.9% of HEARx’s outstanding Common Stock{{6}}[[6]] At that point, there were 65,909,183 outstanding shares trading for about $0.60/share.[[6]] (does this sound familiar to anyone?) and reserved a seat on the HEARx Board of Directors.  As 1996 came to an end, HEARx had issued a whole bunch of common stock and paid out or deemed dividends to the tune of $10 million to owners of preferred stock{{7}}[[7]]SEC Form 10K HEARx Annual Report. 1996.[[7]].  HEARx was on the hook to buy 26,000 hearing aid units from 3M by the end of 1998 or face a big penalty, and pay off substantial debt obligations by the end of 1999.   What about cleaning up at Central Office?  Not to worry, it remained “richly endowed” and full of Friends of Dr Brown, as you’ll see when we finish up on HEARx next week.

What a cliff hanger!  Stay tuned, when the adventures of HEARx turn to the exciting world of reverse stock splits, new partners, and Dr Brown finds a whole lot more money.

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About Holly Hosford-Dunn

Holly Hosford-Dunn, PhD, graduated with a BA and MA in Communication Disorders from New Mexico State, completed a PhD in Hearing Sciences at Stanford, and did post-docs at Max Planck Institute (Germany) and Eaton-Peabody Auditory Physiology Lab (Boston). Post-education, she directed the Stanford University Audiology Clinic; developed multi-office private practices in Arizona; authored/edited numerous text books, chapters, journals, and articles; and taught Marketing, Practice Management, Hearing Science, Auditory Electrophysiology, and Amplification in a variety of academic settings.