Accounting Regulations: FCPA, FCP, Hofstede Cultural Dimensions

*1 The Foreign Corrupt Practices Act versus the International Anti-Bribery and Fair Competition Act of 1998. The Foreign Corrupt Practices Act of 1977 (FCPA) is a United States federal law known primarily for two of its main provisions, one that addresses accounting transparency requirements under the Securities Exchange Act of 1934 and another concerning bribery of foreign officials.

The International Anti-Bribery and Fair Competition Act of 1998 is a United States federal law that amends the Foreign Corrupt Practices Act by implementing the provisions of the Organization for Economic Cooperation and Development's Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

The differences between FCP and the ABFCA are that the ABFCA takes over the FCP when it comes to international bribery whether it comes from a U.S citizen or corporation. The ABFCA also dose a better job of describing what bribery of foreign officials contains. (The act makes it illegal for a citizen or corporation of the United States or a person or corporation acting within the United States to influence, bribe or seek an advantage from a public official of another country).

An example of the FCPA is the Bananagate scandal in which Chiquita Brands had bribed the President of Honduras to lower taxes they were caught shut down and punished by the FCPA. 

**2 Using responses to an attitude survey of IBM employees worldwide, Hofstede identified four cultural dimensions that can be used to describe general similarities and differences in cultures around the world: (1) individualism, (2) power distance, (3) uncertainty avoidance, and (4) masculinity. More recently, a fifth dimension, long-term orientation, was identified. 

Individualism refers to a preference for a loosely knit social fabric rather than a tightly knit social fabric (collectivism). 

Power distance refers to the extent to which hierarchy and unequal power distribution in institutions and organizations are accepted. Uncertainty avoidance refers to the degree to which individuals feel uncomfortable with uncertainty and ambiguity.Masculinity refers to an emphasis on traditional masculine values of performance and achievement rather than feminine values of relationships, caring, and nurturing. Long-term orientation stands for the “fostering of virtues oriented towards future rewards, in particular perseverance and thrift.”

From a review of accounting literature and practice, Gray identified four widely recognized accounting values that can be used to define a country’s accounting subculture: professionalism, uniformity, conservatism, and secrecy. Gray describes these accounting values as follows:

Professionalism versus Statutory Control —a preference for the exercise of individual professional judgment and the maintenance of professional self- regulation as opposed to compliance with prescriptive legal requirements and statutory control.

Uniformity versus Flexibility —a preference for the enforcement of uniform accounting practices between companies and for the consistent use of such practices over time as opposed to flexibility in accordance with the perceived circumstances of individual companies.

Conservatism versus Optimism —a preference for a cautious approach to measurement so as to cope with the uncertainty of future events as opposed to a more optimistic, laissez-faire, risk-taking approach.

Secrecy versus Transparency —a preference for confidentiality and the restriction of disclosure of information about the business only to those who are closely involved with its management and financing as opposed to a more transparent, open, and publicly accountable approach.

 *** The International Accounting Standards Board (IASB) is the independent, accounting standard-setting body of the IFRS Foundation.^[1] The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee (IASC). It is responsible for developing International Financial Reporting Standards (the new name for International Accounting Standards issued after 2001), and promoting the use and application of these standards.

International Accounting Standards Committee was founded in June 1973 in London and replaced by the International Accounting Standards Board on April 1, 2001. It was responsible for developing the International Accounting Standards and promoting the use and application of these standards.

The International Accounting Standards are an older set of standards stating how particular types of transactions and other events should be reflected in financial statements. In the past, international accounting standards (IAS) were issued by the Board of the International Accounting Standards Committee (IASC). Since 2001, the new set of standards has been known as the international financial reporting standards (IFRS) and has been issued by the International Accounting Standards Board (IASB).

International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. The rules to be followed by accountants to maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external. IFRS began as an attempt to harmonise accounting across the European Union but the value of harmonisation quickly made the concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new International Accounting Standards Board took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards International Financial Reporting Standards (IFRS).

The Public Company Accounting Oversight Board (PCAOB) is a private-sector, non-profit corporation created by the Sarbanes–Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies. Its stated purpose is to "protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports". Although a private entity, the PCAOB has many government-like regulatory functions, making it in some ways similar to the private "self-regulatory organizations" (SROs) which regulate stock markets, broker-dealers, etc. in the United States.

 The PCAOB has five members, including a chairman, each of whom is appointed by the U.S. Securities and Exchange Commission (SEC). Precisely two members of the PCAOB must be or have been a Certified Public Accountant. However, if the chairman of the PCAOB is one of those two members, he or she may not have been a practicing certified public accountant for at least five years prior to being appointed to the Board. Each member serves full-time, for staggered five-year terms. The Board's annual budget of approximately $180 million,^[3] which must be approved by the SEC each year, is funded by fees paid by U.S. securities issuers. The organization has a staff of over 600, and its headquarters is in Washington, D.C

Ethics and Global Marketing

Ethics

Ethics are a set of self-rules that help you to do what is right. Ethics are the moral codes that your conscience chooses to either follow or stray away from. Ethics can be difficult to follow; however, if you do make the choice to follow your ethics and make positive decisions then you tend to steer clear of scandals and ethical dilemmas. 

 Making ethical choices may not positively benefit the business in anyway seen by the naked eye, however, being an ethical business does come with major benefits. Of course making the ethical decision might not always be the easiest and might seem to make the company lose money, nevertheless, in the long run it is much more beneficial. Not only do customers notice and appreciate an ethical business, but it also keeps the business in a positive light in the eye of the press, government, and society.

In today’s society, ethics are very uncommon in business. However, they are slowly starting to make a comeback. This is because more and more employees are standing up for what is right and making others realize that ethics are something that should be involved with everyday life, including large business firms. Companies are even starting to include ethics into their training, because they are realizing that customers need and appreciate ethics.

http://www.business-marketing.com/article-businessethics.php

1. Some companies are incorporating ethics into their training? Yes!
2. Above all, a high level of ethics in your business should not be in place at least for the customers? No!

Global Marketing 

Global Marketing has many challenges. Of course, the obvious challenges of different languages, different cultures, different incomes, and so much more, have always been issues for global marketers. The article I choose is called “Five Challenges for Tomorrow’s Global Marketing Leaders: Study.” This article discusses the challenges that new global businesses must face in terms of marketing.

First, the article states disruptive technologies. This is a challenge for global marketers because they must make themselves knowledgeable in all of the new technologies in order to know how to market on them. This is a problem because according to my article, “just 20% consider themselves very knowledgeable about technology, yet by 2017 these CMOS will purchase more technology than their CIO’s.” The next problem my article talks about is globally connected customers. 

This is a problem because the article illustrates how interconnected customers have broken the wall between global and local marketing. Problem three is localization revisited. This is a problem because every culture is diverse and many also consist of strong regional subcultures. Problem four is multi-channel misses, which means that marketing activities are not fully integrated across channels. Problem five is organizational structures, meaning that there is a problem with the structures of the business not being on the same page.

1.  CMOs are struggling to adapt to a world that has fundamentally changed over the course of their careers.
2. A new class of consumers, adept with and empowered by affordable ubiquitous technology, has changed the marketing rules.

POLITICAL FORCES and PHYSICAL FORCES MKTG_485

POLITICAL FORCES

Anarchy – etymology
“an” – without
“arkhos” – ruler
Definition: Absence of a formal system of government
What is your opinion of anarchy as an organizing principle for society? Does it have appeal? Consider the “State of Nature”. In “nature”, don’t you have a right or license to everything on earth? Government places limits on individual rights, e.g., cut a tree, dig a hole, drive car, register a birth, sign up for the draft, start a business, pay taxes, get shots, drink alcohol, hunt, take drugs, have sexual freedom, build a house, own and use a gun, etc.

Let’s consider two opposing views regarding government:

HOBBESIAN VIEW

The state of nature is far from perfect. Want something? Make it and protect it, or take it.

“Life is solitary, poor, nasty, brutish and short.” 

Accordingly, whether the system of government be monarchy, aristocracy, or democracy, it should be absolute. The Leviathon, Thomas Hobbes (1588-1679)

PROUDHONIAN VIEW

The first person to call himself an “anarchist”. “Anarchy is.. the absence of a master, of a sovereign.” “Property is theft.” “Anarchy is order.” "Capital"... in the political field is analogous to "government"... The economic idea of capitalism, the politics of government or of authority, and the theological idea of the Church are three identical ideas, linked in various ways. To attack one of them is equivalent to attacking all of them . . . What capital does to labour, and the State to liberty, the Church does to the spirit[He was irreligious, apparently.]. This trinity of absolutism is as baneful in practice as it is in philosophy. The most effective means for oppressing the people would be simultaneously to enslave its body, its will and its reason.”
Pierre-Joseph Proudhon (1809-1865) wrote The Philosophy of Poverty
Proudhon was overshadowed by Karl Marx in his own time.

6 SYSTEMS

1. ANARCHY
2. SOCIALISM
3. COMMUNISM
4. FASCISM
5. NATIONAL SOCIALISM (NAZISM)
6. DEMOCRACY


H.G. WELLS- 1911
NATIONALIZATION Will be the Magna Carta of the 20TH Century.

Actually, PRIVATIZATION
was the driving economic force.

COMPARATIVE LOOK AT EAST GERMANY & WEST GERMANY

THE RISE OF MARKET CAPITALISM AND FREEDOM

FIRST GREAT GLOBALIZATION OF TRADE, CAPITAL AND INFORMATION- 1870-1914 (WWI) SECOND GREAT GLOBALIZATION OF TRADE, CAPITAL AND INFORMATION- Second half of the 20TH Century to present
EXAMPLES:
Somalia 1960 average personal income 10% higher than in South Korea- Today Somalia’s per capita income is less than 1/10 of S.Korea.
200 years ago, Argentina was richer than the U.S. Today it is about 30% that of the U.S.(GDP/CAPITA) The average income/capita of W.Europe was 40% of that of the U.S. in 1950; today it is 70%.
South America’s average I/C in 1950 was 28% that of the U.S. Today,it’s 22% that of the U.S.

There are only 3 countries in the world, today, with widely diversified share ownership.

• UNITED STATES
• UNITED KINGDOM
• JAPAN

In the U.K., the IPO of BRITISH TELECOM ALMOST DOUBLED THE NUMBER OF STOCKHOLDERS IN THE COUNTRY.
In Japan, nearly 2/3 of companies listed on the Nikkei Dow hold their annual stockholder meetings on the same day. Why?
The Invisible Hand of Adam Smith vs. the Visible Hand of government- What is the efficiency and effectiveness of government?

PUBLIC CHOICE THEORY IN ECONOMICS 

Looks at the decision-maker through the lense of classical economics-Man is a rational agent, acting in his own self-interest. Doing good is only a by-product. James Buchanan won a Nobel Prize for this analysis.(G.Tullock) CALCULUS OF CONSENT 1962
Generally speaking Public Choice Theory suggests that there is little interest in efficiency in government relative to self-interest. Self-interest trumps government decision-making.
Ludwig von Mises and F.A. von Hayek, free market economists, who argued that for an economic system to function properly, incentives must be structured so that dispersed and often conflicting knowledge can be mobilized to obtain gains from exchange and innovation. Individual incentives & decentralization can foster innovation and effective outcomes- Adam Smith’s Invisible Hand.

PRIVATIZATION

The transfer of ownership (or operation) from the public sector to the private sector. When operations are transferred, the public sector should maintain responsibility for proper governance. In vogue, today, are public/private partnerships (PPP’S, not to be confused with the bailout, circa 2009). Examples include Chicago’s Skyway Tollway Bridge 99-year lease to Cintra/Macquarie,
The Indiana Toll Road, Pocahontas Parkway in VA, and Highways 121 and 130 in Texas. Macquarie also owns, maintains, operates and develops airports in locations such as the UK, Thailand and Italy.
In late 2008, Chicago’s Midway Airport, run by the city, was licensed to a private company for 99 years for the sum of $2.5 billion(fell through).
The bailout of Wall Street by the government in late 2008 involved following the Swedish model of a few years ago in buying an equity stake in selected banks. In this U.S. effort the Treasury invest hundreds of billions, perhaps upwards of a trillion dollars. This is a form of nationalization, but one hopes the government will eventually divest itself (sell) of the stocks as the situation allows. During this bailout period, the UK is acquiring up to 50% in its banks.
Larry Diamond of Stanford in his book, Spirit of Democracy, indicates that 23 countries today derive at least 60% of their revenues from oil (Russia, Venezuela, Iran, Nigeria, etc). These states are for the most part authoritarian, leading Diamond to coin the term, “petro-authoritarianism”. Most of these states use their petro-dollars to secure their regimes.
Freedom House, an NGO, tracks democratic trends, and has found that in 2009, 42 states had declining freedom scores, and only 10 had increased scores-the worst global performance since the Cold War.

IRREDENTISM

SORBS FOR A FREE LUSATIA

IRREDENTISM

- (literally, “unredeemed Italy”)
A TERRITORY HISTORICALLY OR ETHNICALLY RELATED TO ONE POLITICAL UNIT BUT PRESENTLY SUBJECT TO ANOTHER

“One of the biggest political challenges of the 21st Century will be irredentism.”
Daniel Patrick Moynihan

Society is pluralistic. It consists of many players, large and small. Business as an institution is an especially important player economically, and its leaders have special responsibilities. Among their responsibilities is the impact of operations on the environment, a part of what is called CSR (corporate social responsibility).

EFFORTS TO UNDERSTAND NATURE

ATBI’S – (All Taxa Biodiversity Inventory)
Background information-
Binomial Taxonomy Carolus Linnaeus- Karl Linne- Swedish Scientist Systema Naturae 1758

ENVIRONMENTAL ETHICS

1. Instrumental Value Ethic
2. Intrinsic Value Ethic

ENVIRONMENTAL/HUMAN DISASTERS
-Minamata, Japan-Chisso Mfg (Mercury)
-Bhopal (Union Carbide accident)
-Chernobyl
-Alaskan Oil Spill
-Hungary Tisza River (Danube)
-Songua/Amur Rivers China/Russia-
2006 -12m ton of benzene spilled when a plant exploded in China.
FUELS- COST- 1MILLION BRITISH THERMAL UNITS (BTU’S)

OIL APPROX. $9
GAS APPROX. $6
COAL $1.85
NUCLEAR .50

THE SPECIAL CASE OF COAL
Scherer Plant
Juliette GA- Largest coal-fired plant in the western hemisphere
4000 MW – Coal from the Powder River Basin, Wyoming (Called the “Saudi Arabia of coal”)
The Scherer Plant “eats” 3.5 coal trains/day,1300coal trains/year,
2000 miles of coal cars-Scherer is the biggest polluter in the U.S.
But on the global scale, Sherer may look small. Planned global coal-fired plants will stunt Scherer- A 12000MW plant is going on line in Orissa State, India

FUELING OUR CARS
ETHANOL- CORN OR CELLULOSIC (SUGAR CANE, SWITCH GRASS,
JATROPHA)
E85 – 85%GAS? OR 85% ETHANOL?
ETHANOL HAS ONLY 60-70% OF THE ENERGY OF GASOLINE, THUS PROVIDES WORSE MILEAGE AT THE SAME OR HIGHER PRICE. THE ENERGY NEEDED TO PRODUCE ETHANOL IS ABOUT EQUAL TO THE ENERGY IT PROVIDES. LARGE QUANTITIES OF WATER (AN INCREASINGLY SCARCE RESOURCE) ARE NECESSARY TO PRODUCE ETHANOL. ANOTHER ISSUE IS THAT FOOD IS TURNED INTO FUEL. IS THAT A GOOD IDEA? CORN PRICES HAVE DOUBLED (FROM $2 TO $4/BUSHEL, CIRCA 2007) GOOD FOR THE CORN FARMER, BUT…
ALSO, ALL PRODUCTS USING CORN ARE GOING UP IN COST/PRICE (cereals, tortillas, corn meal, grits, beef, etc).Soy beans have become more scarce
and lucrative for growing because so much land had been diverted to corn production.
ARE HYBRID CARS THE ANSWER?- AT PRESENT THEY HAVE REPRESENTED ONLY ABOUT 3-4% OF PURCHASES IN RECENT YEARS. WHY?

THE CASE OF BIOSPHERE II-
ATTEMPT TO CREATE A WORLD IN A MICROCOSM
BY SEALING VOLUNTEERS AND NON-VOLUNTEER FLORA AND FAUNA IN A MICRO-WORLD ENVIRONMENT. FAILED!
ONLY ONE UNAUTHORIZED SPECIES SEEMED TO HAVE FLOURISHED.

Are we messing with the planet?
Are we destroying life on earth? (Caution must be used in deciding this as the case of Rachel Carson’s Silent Spring illustrates. Based on questionable reports of scientific studies, DDT was banned. A sane balance needs to be struck regarding nature’s resources and mankind’s welfare.)

Is global warming a fact?
Perhaps, at this time, although data for the past ten years show global cooling. The recent (2009) forest fires in California were due to global cooling. Cold water in the Pacific dries out California, which has a natural dry climate. Many jump to the conclusion that man creates it and that man can prevent it. Both ideas are suspect. What is incontrovertible is that environmental science has been politicized domestically and globally. Have not Earth’s natural forces changed climate for eons, with dramatic effect? You may be too young to have experienced it, but 1816 is called “the year without summer”. The cause was a huge volcanic eruption in Indonesia the year before. Can you identify the volcano?_____________

Tambora, in 1815. When this volcano erupted it spewed millions of tons of sulfur dioxide crystals into the upper atmosphere, each one acting as a tiny mirror reflecting the sun’s rays. This material spread around the earth, cooling tempatures dramatically. Rivers froze in August in the northern U.S. Crops failed or failed to grow much. People starved in some parts of the world. And the eruption even resulted in the eventual publication of Mary Shelly’s Frankenstein. Let’s consider some of Earth’s changes in geologic time.

GEOLOGIC TIME

EONS
ERAS
PERIODS
EPOCHS

Geologic Time

• EON- Phanerozoic
• ERA- Cenozoic
• PERIOD- Quaternary
• EPOCH- Holocene

5 Great Extinctions

Cretaceous-Tertiary 65 million years ago dinosaurs becam extinct-
Chicxulub Crater
Yucatan Peninsula

End Triassic Extinction - 200 million years ago
Permian-Triassic Extinction - 251 million years ago-
Bedout Depression
Late Devonian - 364 million years ago
Ordovician-Silurian - 439 million years ago

A SIXTH EXTINCTION?
Modern Man – the only species not to live in a local ecosystem
100,000 years ago –mass dispersion of modern humans
Europe-40K years ago Neanderthal lasted only about 10,000 years
12,500 years ago North America
Mammoths, Mastodons, Buffalo species became extinct
10,000 years ago Agriculture-Most profound ecological change
8000 years ago Caribbean lost larger species
A new name offered to replace Holocene Epoch-
Anthropocene Epoch

WHAT CAN BE DONE?
Plant a tree?
Switch to CFL?
Conserve? (Sheryl Crow’s famous 1 square of toilet paper)
Reuse? Limit consumption?

Raise energy prices so that earth friendly technologies can be cost effective?
(This appears to be the government’s strategy, e.g. refusing to allow drilling on the 85% of our coastline now deemed off-limits, claiming that the answer is clean energy [solar, wind] when such a transition will take decades, if not generations; not promoting nuclear power, no drilling in ANWAR, pushing consumers into smaller vehicles through tactics such as raising the CAFE standard when the auto industry is bleeding jobs and losing money, etc)

Use all the available energy we can get and try to get it cleanly? Drill here, drill now? Build nuclear plants on a large scale?

ONE SUSTAINABILITY
OPTION
“REMAN”

Remanufacturing

Caterpillar (Corinth, MS) Started recycling diesel engines as a favor to client Ford but found that the process had potential. (New material represents about 70% of the cost of an engine. Remanufactured material is about 40% of the cost of an engine; thus, total cost is lower. Cat, Corinth, has been getting 17 truckloads/day of old diesel engines (75 reman engines/week) the engines can have 2-3 lives. In 2005, sales were about $1 billion, and anticipated annual growth is 15%.

Recycling extends to many product categories:

1. Cameras (disposable)
2. Copiers
3. Cell phones
4. Printers
5. Ink cartridges
6. Even carpet tiles
7. And numerous other products

SUSTAINABILITY

Former Norwegian Prime Minister Gro Bruntland defined sustainable development as development that "meets the needs of the present without compromising the ability of future generations to meet their own needs". Historical reference- Iroquois Confederacy and their Great Law of Peace- included SEVEN GENERATION PLANNING. What will be the impact of our decision seven generations from now? (more than 100 years) Today, this is used by some environmentalists as “SEVEN GENERATION SUSTAINABILITY”. Even businesses often plan for the long term. Matsushita, now renamed Panasonic, is famous for its long-range planning, implementing a hundred year corporate plan. In fact, many cultures have had features consistent with conservation and avoidance of waste, e.g. depression era thrift in the United States (examples?), the concept of “mottainai” in Japan.

SOME CORPORATE CSR INITIATIVES:

WAL-MART
Compact Fluorescent Lights (CFL)
Energy efficient stores
Fleet efficiency
Pressuring suppliers to report CO2 emissions
Labeling of green products
Organic Food line

DELL
Footprint- 385,000 Metric Tons of carbon emissions- 2006
Has asked suppliers to publish carbon footprints-Those who don’t or who are excessive will be “penalized”???
Became “carbon neutral”?
10% of energy usage at hdqtrs. from renewable resources
Had “Plant a tree for me” program; now it is “Plant a forest for me.”

ORGANIC FOODS

Setting aside the possibilities of fraudulent claims of purity, are organic foods an answer to improving the world environment? Some claim that the use of organic coffee and organic bananas would improve the efforts to save the songbirds. Both crops are fertilizer-, pesticide- and fungicide- intensive products. Monocrotophos, methamidophos, and carbofuran are all pesticides used for crops and are classified as Class I toxins by the World Health Organization (WHO). Such applications are said to kill 7-25 songbirds per acre. It is likely that this claim is true, but can the world’s consumers use only organic products? Is that sustainable. Frankly, the amount of resources necessary to produce organic products (vastly increased acreage need, excessive human labor), is costly and relatively inefficient, meaning that most cannot afford these products and that organic foods cannot be produced in sufficient quantity to feed the world. They are, in effect, a wasteful luxury.

The“GreenRevolution”, beginning in the 1950’s, increased crop yields dramatically through the judicious use of fertilizer, proper irrigation techniques, and quality seed selection. These yields are still increasing today, but at a rapidly decreasing rate (1-2%).
Genetically Modified Organisms (GMO), dubbed “Frankenfood” and decidedly NON-ORGANIC, appear to be the only technology likely to prevent mass starvation.
With present technology, everyone on the planet cannot live at the same standard as the developed countries.

Psychology 300 'Null Hypothesis'

Example 1

In regards to probability, what is the additive rule? Provide an example. Given a set of mutually exclusive events, the probability of the occurrence of one event or another is equal to the sum of their separate probabilities. 

What is the probability of a randomly choosing student at Tech having a compact car (A), or an SUV (B), P_(A) = .6, P_(B) = .3P_{(A or B)} = .6 + .3 = .9

In terms of probability, what is the multiplicative rule? Provide an example. The probability of the joint occurrence of two or more independent events is the product of their individual probabilities.

Suppose we have a bag of coins: 30 quarters, 15 dimes, and 55 nickels.P _(quarters) = .30P _(dimes) = .15P _(nickels) = .55

The probability that we draw a quarter on the first trial and a quarter on the second trial:

.30 X .30 = .09

The probability that we draw a quarter on the first trial and a dime on the second trial: 

30 X .15 = .04

Regarding the normal curve, what percentage of the population will fall between +1 and -1 standard deviations? What percentage will fall between +2 and -2 standard deviations? 68% of the pop will fall in the +1 and -1 range 96% of the pop will fall between +1 and -1

What is the difference between the Null hypothesis (H₀) and the Research hypothesis (H_A)? Provide examples of both. A null hypothesis is a hypothesis that may be falsified using a test of observed data, where as a research hypothesis is a statement created by a researcher when they speculate upon the outcome of a research or experiment.

What is the difference between Nominal and Ordinal data? Please provide examples of both. (I know I said no more question about this stuff until the midterm, but someone got them mixed up on the paper assignment) Nominal Data is the values of the scale have no 'numeric' meaning in the way that you usually think about numbers. People or objects with the same scale value are the same on some attribute. Categorical label; Example: Male/Female. Ordinal Data is measured in first second or last, but the ranks do not add any other additional information about the ranking. Example: placing first, second, or third in a race

Example 2

Statistical Decision	True State of the Null Hypothesis
	H0 True	H0 False
Reject H0	1	2
Do not Reject H0	3	4

According to the table above, what does BOX 1 represent? B. Type I Error

H₀ True, Reject H₀

a. Correct Decision 

b. Type I Error

c. Type II Error

d. None of the above

According to the table above, what does BOX 3 represent? A. Correct Decision

H₀ True, Do not Reject H₀

a. Correct Decision

b. Type I Error

c. Type II Error

d. None of the above

According to the table above, what does BOX 2 represent? A. Correct Decision

H₀ False, Reject H₀

a. Correct Decision

b. Type I Error

c. Type II Error

d. None of the above

According to the table above, what does BOX 4 represent? C. Type II Error

H₀ False, Do not Reject H₀

a. Correct Decision

b. Type I Error

c. Type II Error

d. None of the above

Example 3

When should you use an ANOVA (F-test)? Use ANOVA to analyze variance. There must be more than 2 groups, more than one dependent variable, and either interval or ratio data. When should you use a t-test? Use a t-test if you are trying to find out if the variance between groups is significant. It is looking for differences. There must be 2 groups and the data must be interval or ratio.

When should you use a correlation? Correlation is used to find relationships amongst groups. What is the difference between an independent and dependent variable? An independent variable is the variable which researches have control over and can manipulate to affect the dependent variable. The dependent variable is being measured and is affected by the independent variable.

What is your favorite statistical test? My favorite statistical test is the t-test because if someone had a stutter you couldn’t tell if they were talking about just a regular test or a t-test

Final Note:

Please use your book, notes, and any other resource you choose to answer the following questions. Please read the questions carefully and answer them completely. 

Please remember to put your name on your quiz. After you have completed the quiz, please submit it via the digital dropbox on blackboard. To access the digital dropbox, log in to your blackboard account. 

Next select PSYC-300 002. On the left of your screen, just under external links, select tools. Next select the third option down, digital dropbox. From there select add file and add your quiz. BE SURE TO THEN CLICK “SEND FILE.” If you do not send your file, I will not be able to score your quiz. If you have any questions please feel free to email me. Best of luck.

The Ear Store

₍(⁽⁽The Ear Store_™⁾⁾)₎

Affordable, High Quality Hearing Aids

For the First-Time Buyer and Casual Wearer

(in a Couple of Hours)

Main Office:

19517 Frazier Dr.

Rocky River, Ohio 44116

216-650-1007

The Ear Store: Table of Contents

Executive Summary

Description of Venture

Industry Analysis

Technology Plan

Marketing Plan

Financial Plan

Production Plan

Organizational Plan

Operation Plan

Executive Summary

Introduction

Hearing loss is one of the most prevalent chronic conditions in the United States affecting nearly 28 million people, 19 million of whom are over the age of 45. Significantly, the numbers are increasing due to the aging Baby Boomer population. Fortunately 90% of hearing losses can be helped with hearing instruments. Yet astonishingly, less than 20% of those who could benefit actually use a hearing aid. The main reasons for this low market penetration are cost (averaging $2000 per pair), vanity, denial, and customer confusion created by a fragmented industry that supports 7 different types of businesses to purchase a hearing aid from. The issue of cost is particularly important because most health insurance plans do not cover hearing aids.

Only a few small manufacturers and vendors in the United States have specifically focused on the price and confusion problems. None have attempted to market “discount” hearing aids on a national level. More importantly, none have explicitly targeted the first-time buyer or part-time user of hearing aids. As a result, most people do not know where to go to receive high quality hearing service for the lowest price. Specifically, there is no nationally recognized destination location for hearing care. The Ear Store will alleviate this problem.

The Ear Store is a conveniently-located hearing aid vendor that will provide its customers throughout the nation with fast, affordable, high quality, one-stop hearing service. Goods and services include hearing aids, Assistive Listening Devices (ALDs)¹, and hearing evaluations from a licensed audiologist²—the best care available without seeing a doctor. The Ear Store is unique because our product line is centered on instant-fit digital and disposable hearing aids—two recent innovations that will satisfy the needs of first time buyers and “casual” wearers. Another unique aspect of The Ear Store is location. The Ear Store will be located in areas that invite unscheduled “walk-in” customers (i.e. superstores and malls), and not in medical or professional buildings as seen with most current business models. Sales will be generated through strong advertising, educational, and public relations campaigns, thus eliminating the aforementioned problem of customer confusion.

The Ear Store has identified four proprietary items that will provide significant barriers to our competition. We intend to implement these goods and services at various stages in the development of the company. First, The Ear Store will immediately set up an IT system that will enable a customer to access his or her audiogram³ from any Ear Store nationwide for the purposes of easy customization of hearing devices. Second, within the first year of operation, we will begin manufacturing our own line of disposable and “limited wear” hearing aids in response to the shortcomings of the existing disposable models manufactured by Songbird Corporation. Third, within the first 3 years of operation, we will manufacture our own line of discount ALDs that will allow for custom audio spectrum programming using the customer’s audiogram—a proprietary concept that will be facilitated by our IT system. Finally, in 5-7 years, The Ear Store will enter the gigantic markets of personal communications and entertainment audio with our line of “Earbud Audio Interfaces” which are basically hi-fidelity hearing aids that will enable any person (not just the hard-of-hearing) to listen to music, talk on the phone, etc. while having the option to hear what is happening around them “in real life.”

Our initial target market consists of males over the age 45 who are first-time hearing aid purchasers. This group represents approximately 9.4 million people in the U.S who have not received help for their hearing loss. Within 5 years The Ear Store plans to achieve a 4 percent market penetration for hearing aids and a 3.6 percent market penetration for Assistive Listening Devices. The Ear Store will generate annual revenues of $260-million and profits of $25-million. Within 7 years The Ear Store plans to begin meeting the market demands of over 1 billion people worldwide who will own person communications systems.

Entrepreneurial Team

The President and CEO of The Ear Store is Edward Caner. With his graduate study of acoustics, his experience as a well-known musician and recording engineer, his personal familiarity with the challenges faced by the hard of hearing, and his current studies in the Physics Entrepreneurship Program at Case Western Reserve University, Ed is uniquely positioned to revolutionize the hearing aid industry. To begin with, he has assembled a truly formidable team of advisors, most of whom are eager to play an active role in The Ear Store. Thus The Ear Store already has a prospective management team that combines technical expertise, industry experience, consumer focus, and significant managerial, legal and startup experience. This itself speaks highly of Ed’s talent as a leader, and bodes well for The Ear Store’s success. As a final note, Ed has been labeled as “a great problem-solver” by his mentors and peers, which is perhaps most evident in his recently-published article in the New York Times on anthrax detection using mice and guinea pigs.

Board of Directors

Carlson H. Kidkaner, President and CEO, The Ear Store

Sam Stewart, Ph.D., Mixon Chair for Entrepreneurship Studies, Weatherhead School of Management

Henry Boyd, M.d., Director, Physics Entrepreneurship Program, Case Western Reserve University

Advisory Board

Jared Geohagen, Senior Partner, Becker Marketing Group

James Goldstein, Director, gedas (IT division of Volkswagen Corporation of America)

Syd F. Barrett, President, Lakeside on Lake Erie Board of Directors

Katherine I. Patterson, M.A., CCC-A, 7-year Owner, Listening Advantage, Cleveland, OH; Clinical Coordinator of Audiology, Cleveland State University (1993-1996)

Bill Bucksworth, 15-year National Delegate, Self Help for Hard of Hearing (SHHH), Cuyahoga County Commissioner’s Panel for Hearing Disabilities

George Lee, EE, MBA, Fuji Medical Systems

Other Active Advisors

David Glenn retired Senior Partner, Jones, Day, Reavis & Pogue

Patton Weber, retired CEO, Fairview General Hospital (a division of Cleveland Clinic Health Systems)

Hilary Hilton, 9-year associate with Accenture, Inc.

Steven Works, CCIM, Vice President, Grubb and Ellis Real Estate Brokers, Cleveland, OH

Andrew Weever, President, Normandy Insurance Agency, Vice President, Busch Family Funeral Homes; (largest funeral home company in Ohio)

Sabrina Noman, Engineer, Telarc International

Flotina Lulzington, Engineer, NPR’s E-Town

Annie Bricker, Rock Star, TV and radio personality

Timothy Hicks, former disk jockey; 6-time nominee for Country Music Personality of the Year

Technology Overview

The Ear Store is taking advantage of revolutionary breakthroughs in the hearing aid industry such as digital, instant-fit, and disposable hearing aids. The first digital hearing aid was introduced to the market in 1995. The devices are superior to their analog counterparts in countless aspects, but gained slow acceptance because of high cost. However, like most high-tech consumer devices, the price is dropping—in some cases exponentially. As a result, they will soon completely replace analog units. Instant-fit hearing aids do not require custom ear molds, which are time-consuming for the customer and can cost as much as $150 per pair. Eliminating these molds makes for a quick purchasing process which, in conjunction with the lower price, is especially appealing to first-time buyers. Disposable hearing aids also do not require ear molds and are new to the market within the past year. These devices lack the durability of conventional hearing aids but are extremely inexpensive. The price point makes it possible for a person to see what it is like to wear a hearing aid before committing to a more expensive model, such as a digital instant-fit. In addition, with the introduction of our proprietary Limited Wear hearing aids, a person will be able to own a backup pair or multiple pairs.

The Ear Store sees a great opportunity in building upon the disposable hearing aid concept, starting with improvements on the present model by Songbird. The Songbird unit lacks various simple computational algorithms and is incompatible with the standardized PC interface for fitting to a customer’s audiogram. We also feel that higher quality components from other manufacturers can be used for the same cost. In addition, Earcrafters plans use its knowledge of the component market to release additional intermediate-quality models such as “limited wear” or “semi-disposable” hearing aids.

Currently ALDs cannot be programmed to a customer’s audiogram. Our own line of ALDs will allow this, much in the same way that a hearing aid is custom-programmed. Our IT system will give customers the convenience of custom fitting when purchasing both hearing aids and ALDs from locations nationwide.

Marketing

A recent report from Self Help for Hard of Hearing People (SHHH) listed both advertising and word-of-mouth as a major influencing factor when people buy hearing aids. Thus The Ear Store intends to use both advertising and public relations as its primary marketing tool, potentially focusing on the following unique trademarks:

• “Affordable, High Quality Hearing Aids for the First-Time Buyer and Casual (or Part- Time) Wearer”
• “Hearing Aids in a Couple of Hours”
• “Your First Quick Stop for Hearing Health”
• “Don’t you think it’s time to have your hearing checked?”
• “Have you had your hearing checked?”
• “The Best Hearing Care Without Seeing A Doctor”
• “Limited Wear” or “Extended Wear” hearing aids

Individual Ear Store locations will be chosen based upon the 45 and over population demographic. Other elements that will be considered when choosing an Ear Store location are familiarity and easy access. To help with this, The Ear Store is considering a strategic partnership with chains such as Wal-Mart or LensCrafters.

The Ear Store has recently enlisted the help of Becker Marketing Group, a full-service marketing diagnostic and remediation counsel that has been developing programs for various markets since 1974, including Banking, Computer Systems-Hardware and Software, Building Products, Real Estate, and physicians’ groups such as Neurological and Eyecare Practices.

Building on the formidable experience and expertise of our Team, The Ear Store will be well-poised to stay ahead of the competition.

Sales and Profits

The Ear Store will establish market dominance in 5 years following a 4-phase time line. The first phase will consist of 1 store followed by 2 more local stores in 7-8 months. Phase 2 will consist of the addition of 7 regional stores approximately 8 months later. This is followed by Phase 3 that will consist of 13 more regional stores 3 months later. Phase 4 will see the addition of 177 stores nationwide. Total investment capital needed to reach Phase 4 cash flow projections is $45.2 million to yield annual sales of $260 million and profits of $25 million.

Summary of Operation

Technological trends in the hearing aid business are creating lower prices, higher quality sound, and less interaction time with professionals, but few businesses are set up to operate under this new paradigm. As a result, the plummeting cost of hearing aid production is not paralleled by a drop in consumer price, which remains relatively high. The Ear Store intends to embrace this paradigm shift and set the standard for hearing aid prices through aggressive wholesale purchasing and marketing.

Closing

The consequences of unaided hearing loss are quite pervasive. The effects include sadness, depression, worry, anxiety, paranoia, emotional turmoil, insecurity, and a reduction in social activity. On the other hand, those who have begun to use a hearing instrument report benefits that include better relationships with their families, better feelings about themselves, improved mental health, and greater independence and security. Unfortunately only a small percentage of those with hearing loss have actually sought help. Fortunately The Ear Store will provide opportunity, impetus, and convenience for these suffering individuals, thus bringing tremendous value to the lives of our customers as well as significant returns to our investors.

The Ear Store seeks startup capital of $6 million from a group of dynamic investors who will complement the technical and creative expertise of the existing team, especially in the areas of retail and national name-branding. A strong investment team in conjunction with the outstanding Ear Store lineup and our proprietary technologies will create a significant force in the hearing aid industry and in the business community as a whole.

Description of Venture

1.Introduction

The Ear Store is a conveniently-located hearing aid vendor that will provide its customers throughout the nation with fast, affordable, high quality, one-stop hearing service. Goods and services include hearing aids, Assistive Listening Devices (ALDs)⁴, and certified hearing evaluations from a licensed audiologist⁵—the best ear care available without seeing a doctor. The Ear Store is unique because our product line is centered on instant-fit digital and disposable hearing aids—two recent innovations that will satisfy the needs of first time buyers and “casual” wearers

2. Products

2.1 Disposable Hearing Aids:

Songbird brand is the only disposable on the market. This device has a built-in battery that lasts for the intended life of the device (approx. 40 days). In response to various shortcomings of this Songbird, The Ear Store will release its own line of disposables within the first year of operation.

2.2 Limited Wear™ Hearing Aids:

The market currently lacks an intermediately-priced high-quality device to bridge the gap between the $80/pr disposables and the $3000/pr digitals. The Ear Store has identified various existing devices that can be modified to satisfy this niche and will release its own brand of proprietary Limited Wear™ hearing aids within the first year of operation. This product line will enable a customer to own multiple pairs for different aural situations such as concerts (no background noise) or parties (lots of background noise)—much like owning multiple pairs of eyeglasses. Both the Limited Wear™ and disposable models are currently being developed with the assistance of the Physics Entrepreneurship Program at Case Western Reserve University and a potential grant from the National Collegiate Inventors and Innovators Association.

2.3 Instant fit hearing aids:

Of the few instant fit hearing aids on the market, The Ear Store has singled-out one particularly inexpensive, high quality device: The Conforma® by Sonic Innovations⁶. This same company is about to release another model of higher quality and lower cost called the “Odyssey.” The Ear Store is currently evaluating other instant fit devices such as the Aspire® by Siemens and two digital/analog hybrids from Earcraft and The Hearing Shop. Within the first 3 years of operation, The Ear Store will have its own brand of instant fit.

2.4 Assistive Listening Devices (ALDs):

The Ear Store will sell telephones, telephone accessories, television/home theater accessories, personal amplifiers, doorbell/fire alert systems, and do-it-yourself public systems for small organizations. For a complete list of current “Ear Store Approved” devices see appendix. The Ear Store will release its own brand of programmable ALDs within first 3 years of operation.

2.5 Hybrid Devices:

The Ear Store Earbud Audio Interfaces™ are proprietary hi-fidelity multi-purpose in-the-ear devices that will enable any person (not just the hard-of-hearing) to listen to music, talk on the phone, etc. while having the option of conversing with someone standing next to them in the same room. These will be released within 5-7 years

3. Services

3.1 Audiology:

The Ear Store will be staffed by certified professional audiologists. Services offered will include ANSI certified hearing evaluations, consultations, assistance with the purchase of the correct hearing instrument, proper fitting of the device, and customer education. In order to insure customer satisfaction, 2 follow-up visits are included in the purchase price of each pair of non-disposable hearing aids. Other services include quick, safe earwax removal and referral to a physician if needed.

3.2 Information Technology

Aside from implementing a full-service website, The Ear Store will set up an IT system that will enable a customer to access his or her audiogram⁷ from any store in the country for the purposes of easy customization of hearing devices.

4. Size of Business

The Ear Store intends to become the largest hearing aid dispenser in the world. The hearing aid dispensing industry is currently ripe for consolidation and The Ear Store will be the forerunner. The current goal of 200 stores in over 40 cities nationwide will be met within 5 years.

5. Office Equipment and Personnel

5.1 Personnel:

Each Ear Store location requires 3 staff audiologists as well as two full-time receptionist/salespeople. In order to insure customer convenience each store will be open 71 hours per week. Audiologists will be available by appointment, although walk-ins may be seen on a first-come-first-serve basis.

5.2 Equipment:

Each Ear Store “shopping area” will be filled with the most exciting, innovative ALDs (see products above). Each store will also have one private, enclosed hearing testing area equipped with the latest testing devices, ear scopes, etc. as well as a soundproof booth. Two adjacent rooms will contain two respective fitting centers equipped with PCs for custom programming of each hearing aid. These rooms also contain an artificial listening environment consisting of an inexpensive surround system that mimics real-life sounds to help the customer learn about the hearing aid as well as assist in the customization of the device.

6. Background of Entrepreneurs

Edward M. Caner—President and CEO

Edward Caner is currently master’s degree candidate in the Physics Entrepreneurship Program at Case Western Reserve University. He also holds a master’s degree in violin performance from Cleveland State University, undergraduate degrees with honors in physics and engineering from Miami University, and studied graduate acoustics in the Department of Physics at Purdue University. Labeled by the Cleveland Plain Dealer as “One of the most versatile musicians on the planet” he has performed with such diverse acts as Smokey Robinson, Page and Plant, Natalie Cole, Luciano Pavarotti, Mel Torme, The Moody Blues, Al Jarreux, Harry Connick, Jr., Gene Pitney, Leslie Uggams, Dihanne Carroll, Mannheim Steamroller, Lori Morgan, Ray Price, Yes, and The Trans-Siberian Orchestra. As a freelancer in the Cleveland area he served as interim Concertmaster of the Wheeling Symphony Orchestra and performed as section violinist with The Cleveland Chamber Symphony and the Ohio Chamber Orchestra. Mr. Caner most recently toured as soloist with Wayne Newton, The New Barleycorn from Ireland, and bluegrass/rock group Runaway Truck Ramp. His national recording credits include two releases with Michael Stanley (produced by the legendary Bill Szymczyk) and a recent release by folk/bluegrass artist Sally Shuffield (produced by Caner and Greg Schochet). Mr. Caner’s teaching credits include clinician at the 2000 Rocky Grass Academy, 2000 Trinity Chamber Series in Cleveland, and the 1997 and 1998 Western Slopes Summer Music Festival in Crested Butte, Colorado. For 3 years he taught bluegrass/Celtic fiddle at H.B. Woodsong’s in Boulder. He has been published in the New York Times and has recently released a book called Fiddling for Classical Stiffs.

Mr. Caner is deeply immersed in the plight of the hard of hearing. His mother suffers from a 70 percent nerve loss in both ears and has worn hearing aids since childhood. Two out of three of his mother’s sisters also wear hearing aids as does a cousin and both grandmothers. Mr. Caner helped design the loop system that is currently being used by the Cleveland-West chapter of the Self Help for Hard of Hearing People and has also installed several church systems.

Industry Analysis

1.Introduction

Hearing aid technology has experienced significant changes within the past 10 years. However the manner in which the devices are sold has not changed for almost 50 years. This is particularly important when considering that technology is driving prices down and quality up. Thus a high margin/low volume business model must soon yield to a high volume/low margin paradigm in order to realize market penetration. This is most effectively achieved with a nationally-recognized business name and product brand. In short, the hearing aid industry is ripe for consolidation and the Ear Store intends to set the standard.

2.Future Outlooks and Trends

2.1 Technology and Price

Presently the most concrete changes in the hearing aid industry are escalating technology and diminishing costs. Consider the following scenario: In 1995, before the release of the digital hearing aid, there were less than 1.5 million hearing aids in existence in the United States. Each one required various special components that could not be “borrowed” from other industries. This meant fewer component sources, less competition, and higher prices. Today, a vast array of computer components and related devices are becoming miniaturized and the hearing aid industry is able to purchase parts and ideas from this diverse market—driving costs down. Smaller companies now have the opportunity to build equally competitive devices based upon emerging common knowledge, off-the-shelf components and minor proprietary innovations—a trend that is quite familiar in the computer industry. One company in particular that has shown such savvy is Sonic Innovations, a digital-only hearing aid manufacture. Currently the fastest growing company in the history of the hearing aid business, S.I. did not even exist in 1997 yet went public in January of 2002 amidst a brutal IPO climate. The company will continue to influence the market as it releases its newest line of digital hearing aids in 2002 that wholesale for less than 40% of the wholesale price of similar competitive models. In addition, S.I. will have two different instant-fit models on the market at this time, which bodes well for a “new business paradigm.”

2.2 New Business Paradigm:

The largest market segment of people who need hearing aids⁸ do their regular shopping at Wal-Mart, Target, Home Depot, OfficeMax, and CompUSA, to name a few. They know that they will receive excellent, fast service with low prices and easily-accessible locations. This is not the case with the current business models for hearing aid vendors. The aspects of service, price and location are often complete unknowns because of the plethora of sole proprietorships, small partnerships and other types of businesses that are set up only for small market penetration. But as the cost of hearing aids plummet, a volume-selling, large-market paradigm must be adopted. The Ear Store business model will provide such a paradigm with excellent, fast service at the lowest possible price in a convenient setting.

3. Analysis of Competition

In 1996 the Better Business Bureau listed 6 ways of purchasing a hearing aid: Mail (incl. Internet), University, Hospital, Otolaryngologist (MD), Clinical Audiologist, or through a Hearing Aid Dispenser. Each business model varies in level of customer interaction, training, philosophy, type of service, and price structure. These differences are often confusing because the customer usually does not know what services are needed as well as what services are included in the price—especially if insurance is an issue⁹. In addition, most of the business models are small and cannot afford informative advertising budgets. Furthermore, most businesses are located in professional buildings with an uninviting “doctor’s office” flavor. A few national chains have appeared but have gained little respect from the national hard of hearing communities, perhaps because of their lack of focus on quality service.

Recently, a 7^th type of business model has emerged: The Manufacturing Dispenser. The manufacturing dispenser takes advantage of the widespread availability of inexpensive off-the-shelf components which makes it feasible to construct a hearing aid “on location” for less than the wholesale price of some of the major manufacturers.

3.1 National and Regional Chains/Potential Competition:

• Miracle Ear has stores throughout the country, some of which are located in Sears stores. They manufacture and sell their own product line. Although their brand became a household name due to ad campaigns in the late eighties, this company never gained the reputation of being a reliable source of quality goods and services. There is currently no indication of selling disposables or instant fit, and prices are relatively high.
• Sonus, Incorporated, has purchased and franchised many private-practice audiologists around the country. However, most Sonus franchises remain in the same inaccessible locations such as doctor’s offices and professional buildings. Advertising is done in the Reader’s Digest with no local advertising or PR. Thus Sonus appears to be more of a buying group than a potentially recognizable national brand.
• Economy Hearing Aid Centers boasts 80 stores in Oklahoma, Texas, and Kansas, but further investigation reveals nothing more than information displays in many of them (we have only found 15 phone numbers of actual locations). They operate primarily out of Wal-Marts with a couple of mini-mall storefronts with rather inconvenient hours (i.e. closed on Sunday). The target market is lower income hearing aid wearers. Their product line is mostly old-style analog devices. They have a strategic partnership with Siemens, although the entire Siemens product line is not available at Economy, including the instant-fit models. There is currently no indication of E.H.A.C. selling disposable models, either.

4. Market Segmentation

The overall hearing aid market can be broken down into age groups, ethnic groups, income groups, occupation, and geographic location. The largest demographic group with hearing loss in the US is people over age 65 with a prevalence in men of 35% and a prevalence in women of 24%. The next highest group is men between the ages of 45 and 64 with a hearing loss rate of 19%. Racially speaking, whites have a much higher rate of hearing loss over age 45. In addition, hearing loss generally becomes less prevalent as income rises.

Galludet University, “The Nation’s Premier University For The Deaf And Hard Of Hearing”, lists the following additional demographics:

• Gender:

• prevalence for males: 10.5%; females: 6.8%. Within age: . Under 45, men: 4.3%, women: 3.0%; 45-64, men: 19.1%, women: 8.8%; 65 and over, men: 35.4%, women: 23.8%.

• Race/ethnicity:

• prevalence in White population: 9.4%; in Black: 4.2%; non-Hispanic: 9.1%; Hispanic: 4.2%. Within age: Under 45, Whites: 3.8%, Blacks: 3.0%; 45-64, Whites: 14.6%, Blacks: 7.0%; 65 and over, Whites: 30.3%, Blacks: 16.3%.

• Income:

• Less than $10,000: 12.4%; $10,000-24,999: 10.7%; $25,000-49,999: 7.3; and $50,000 and over: 6.1%.

• Urban vs. rural:

• Urban: 7.9%; rural: 11.1%.

• Employment:

• 8 million employed. Of these: 29%: professional/managerial; 34%: sales, service, & administrative support; and 37%: other.

• Age at onset:

• 5.4% before 3; 14.2% between 3 and 18; 76.3% 19 and over.

• Etiology:

• 33.7%: noise; 28%: age; 17.1%: infection, injury; 4.4%: birth.

• Geographical region:

• Prevalence in the northeast: 7.9%, midwest: 9.3%; south: 8.7%; and west: 8.5%.

4.1 Industry and Market Forecasts

Although forecasts and market estimates vary, all show increasing sales due to the fact that the baby boomer population is getting older and hearing naturally gets worse with age. Income, race, and gender demographics will also play a very important roll in future sales of hearing aids. With these expanding markets The Ear Store intends to easily meet its sales and profit goals.

Technology Plan

1. Description of Technology

1.1 Digital Hearing Aids

The Ear Store is focusing primarily on digital aids, specifically the two most popular styles: Behind-the-ear and canal aids. Hearing aids consist of 6 to 8 major components:

1. Microphone—converts sound into electrical signal.
2. T-coil (optional)—captures signal via induction (phone receiver or loop system).
3. DSP Chip(s)—convert signal to digital domain, process information with various algorithms, then convert information back to analog; may contain user controls such as volume, tone, compression, noise reduction.
4. Amplifier Chip—boosts “processed” analog signal power; often part of DSP chip.
5. Receiver—miniature loudspeaker that converts electrical signal back into sound.
6. Power Supply (battery).
7. Outer Shell—protection of circuitry and physical fit to ear.
8. Ear Mold—ear canal piece for behind-the-ear models.

1.1.1 Chip Set and Algorithms

The differences in sound quality between hearing aids can be ascribed primarily to the chip set, particularly the computational architecture of the chip in conjunction with the programmed algorithms. There are many chips available from OEM sources such as Gennum, Knowles, Etymotic Research, HEI, 3M, and Sonic Innovations. Software is more difficult to obtain—many hearing aid companies keep it a secret. However packages containing basic algorithms are slowly becoming available for considerably less money than what is offered through licensing by larger corporations. The following algorithms are commonly (but not always) used by digital chips:

1. Equalization—fits the device to the subject’s hearing test results (audiogram).

-This is a basic feature that must be present on all models.

2. Compression—automatically reduces volume for loud, sudden sounds.
3. Expansion—automatically increases volume for persistent soft sounds.
4. Noise Reduction—reduces background noise such as fans, crowd noise, etc.
5. Feedback Elimination—automatically detects and kills “whistles”.

1.2 Instant Fit

These devices rely on various schemes for instantly conforming to a person’s ear canal, eliminating the need for custom ear molds. They are designed in specific sizes or as one-size-fits-all.

For behind-the-ear hearing aids, multiple-size mold-less ear buds are beginning to emerge, especially in conjunction with the increasing demand for mobile communication devices. These buds (or ear tips) deliver sound into the ear canal via a tube that is attached to the hearing device.

1.3 Disposable

The Songbird is a disposable instant-fit “programmable analog” hearing aid, which means that it is an analog device that is controlled by a computer chip. Among other shortcomings, the Songbird does not interface with NOAH (the industry standard for interfacing with PCs for the purpose of quick custom programming). The Songbird has a built-in battery that lasts the life of the device—approximately 40 days.

2. Technological Comparison

2.1 Analog vs. Digital vs. Our I.T. System

Older style analog aids do not have the aforementioned algorithms except equalization. They thus provide lower resolution, higher distortion, and higher power consumption. Programming for analog aids usually has to be done in the factory; programming for digital aids is quick, precise, and performed in the dispenser’s office with nothing more than a low-cost interface and a personal computer. This cuts down on interaction time with professionals and results in lower labor costs. The flexibility of digital aids solves the common problem of hearing loss that changes over time as well as helping to lower the return/refund rate. This flexibility also opens the door for innovation. The Ear Store will implement an IT system that will enable a customer to access his or her personal profiles and customize any hearing device quickly from any Ear Store location in the nation. No such formal system currently exists in the United States.

2.2 Instant Fit vs. Ear Molds

Both instant fit and disposable devices do not require custom ear molds, which are time-consuming for the customer and cost as much as $150 per pair. Eliminating these molds makes for a quick purchasing process which is especially appealing to first-time buyers. Only a few non-disposable instant fit in-the-canal hearing aids have reached the market with more to follow. Of particular note is The Conforma S.E. by Sonic Innovations, a new Utah-based company that has created a strong company around a proprietary 9 band chip and noise reduction algorithms. Dealer cost for this breakthrough digital unit is about 60 percent less than the cost of a “standard” digital hearing aid. This same company will be releasing a follow-up model called the Odyssey early next year that is smaller, less expensive, and practically invisible. The Ear Store intends to initially sell the Sonic Innovations product line, but we believe that we can significantly beat their targets with our own line of instant fit.

2.3 Disposable

The Ear Store sees an excellent opportunity to release its own product line of disposable hearing aids, building upon the significant, easily correctible deficiencies in the model by Songbird. Specifically, this unit lacks various simple computational algorithms and is incompatible with the standardized PC interface for fitting to a customer’s audiogram. We also feel that higher quality components from other manufacturers can be used for the same cost. Our disposable hearing aids are currently being developed with the assistance of the Physics Entrepreneurship Program at Case Western Reserve University and slated for release within the first year of operation.

2.4 Limited Wear (Semi-Disposable)

The current market lacks a high-quality programmable hearing aid to bridge the gap between $80 disposables and $2,000 digitals. The Ear Store will fill this need with a proprietary line of intermediate-quality hearing aids. Current models that fill this price gap use 30-year-old analog technologies and lack the quality that is currently available at the same component cost.

2.5 Assistive Listening Devices

Currently ALDs such as telephones and television headphones cannot be programmed to a customer’s audiogram which is frustrating and sonically annoying for people with different types of hearing loss. Much in the same way an equalizer functions in a hi-fi stereo system, our ALD circuitry will allow custom programming for each individual’s audio spectrum needs. Our IT system will give customers the convenience of immediate custom fitting when purchasing ALDs from locations nationwide.

Earbud Audio Interfaces

The Ear Store will take advantage of the plummeting cost of microelectronics to pioneer new devices such as the “Earbud Audio Interface.” This device contains all the aspects of personal headphones merged with all the aspects of a hearing aid, enabling cordless entertainment and communication without forgoing a connection to outside “real-life” sounds. In other words, a person can listen to a baseball game in church without missing a word of the sermon—and nobody would “be the wiser.” The Ear Store believes that such an inexpensive device will be feasible to build and sell within 5-7 years.

Marketing Plan

1. Target Market

Our target market for the first 5 years of operation is males age 45 or over with hearing loss. Studies indicate the following demographics of hearing impairment:¹⁰

• 45-64, men: 19.1%, women: 8.8%
• 65 and over, men: 35.4%, women: 23.8%.

Population of Males Currently in the US with Hearing Loss:

Age Total Population Number with Hearing Loss

45-64: 31 million 5.9 million

65+: 14.6 million 3.5 million

total: 45.6 million 9.4 million

This total population group is increasing at a rate of nearly 3 percent per year (US Census). This translates to a .6 percent annual increase in people with hearing loss age 45-64 and a 1.1 percent increase in people with hearing loss age 65 and over.

1.1 Target Market Needs:

People in our target market need a reason to seek help for their hearing problem. Most people do not seek help because of the following reasons:

• Hearing aids too expensive
• Ignorance: They do not know where to go for quick, inexpensive service
• Vanity
• Denial

1.2 Satisfying Target Market Needs

• Supply inexpensive hearing aids that are easy to operate and inconspicuous
• Supply effective educational advertising

• Build convenient stores with convenient hours and knowledgeable staff that has a trustworthy reputation
• Offer the fastest service possible

2. Promotion

The Ear Store plans to generate sales through extensive advertisement and public relations campaigns. The Ear Store intends to potentially focusing on the following unique trademarks:

• “Hearing aids for the first time buyer”
• “Hearing aids for the casual or part-time wearer”
• “Affordable, High Quality Hearing Aids in a Couple of Hours”
• “Your First Quick Stop for Hearing Health”
• “Don’t you think it’s time to have your hearing checked?”
• “Have you had your hearing checked?”
• “Limited Wear” or “Extended Wear” hearing aids

The Ear Store has recently enlisted the help of Becker Marketing Group, a full-service marketing diagnostic and remediation counsel that has been developing programs for various markets since 1974, including Banking, Computer Systems-Hardware and Software, Building Products, Real Estate, and physicians’ groups such as Neurological and Eyecare Practices.

3. Pricing

Pro forma pricing was figured on a 50-60% gross margin which is less than the industry average of 100%. The Ear Store believes it is important to keep prices as low as possible due to the fact that current low market penetration is attributed to high price.

4. Location of Stores

Individual Ear Store locations will be chosen based upon the 45 and over population demographic. Other elements that will be considered when choosing an Ear Store location are familiarity and easy access. To help with this, The Ear Store is considering a strategic partnership with chains such as Wal-Mart or LensCrafters.

5. Product Forecasts

Goal: 4% market penetration = 365,000 pairs of hearing aids sold per year in the US.

6. Purpose and Objectives of the Organization

Our objectives are to make hearing care available and affordable. Our purpose is to help the world hear.

Financial Plan

First Year (2003) Pro Forma Income Statement by Month—The Ear Store

Fiscal Year Begins 1/03	Jan		Feb		Mar	Apr-03	May-03	Jun-03	Jul-03	Aug-03	Sep-03	Oct-03	Nov-03	Dec-03
SALES	0		0		0	0	32,451	43,268	54,085	75,719	97,353	108,170	108,170	108,170
COST OF GOODS SOLD							19,707	26,276	32,845	45,982	59,120	65,689	65,689	65,689
Gross Profit	0		0		0	0	12,744	16,992	21,240	29,736	38,232	42,480	42,480	42,480
OPERATING EXPENSES:
Salary expenses						19,427	19,427	19,427	19,427	23,560	23,560	23,560	23,560	23,560
Outside services						3,000
Supplies (office and operating)						40,000	100	100	100	100	100	100	100	100
Web Site, IT						2,000	100	100	100	100	100	100	100	100
Audiologist insurance						350	350	350	350	525	525	525	525	525
Repairs and maintenance						150	150	150	150	150	150	150	150	150
Advertising						10,817	8,654	6,490	5,408	4,110	4,110	4,110	4,110	4,110
Car, delivery and travel						100	100	100	100	100	100	100	100	100
Accounting and legal						3,000	150	150	150	150	150	150	150	150
Rent						1,250	1,250	1,250	1,250	1,250	1,250	1,250	1,250	1,250
Telephone						100	100	100	100	100	100	100	100	100
Utilities						75	75	75	75	75	75	75	75	75
Insurance						75	75	75	75	75	75	75	75	75
Taxes (real estate, etc.)						100	100	100	100	100	100	100	100	100
Losses from Returned Merchandise								1,014	1,014	1,521	1,521	1,521	1,521	1,521
Interest
Depreciation
Total Expenses	0		0		0	80,444	30,631	29,481	28,399	31,916	31,916	31,916	31,916	31,916
Net Profit (Loss)	0		0		0	-80,444	-17,886	-12,489	-7,159	-2,180	6,316	10,564	10,564	10,564

2^nd Year (2004) Pro Forma Income Statement—

The Ear Store

Fiscal Year Begins 1/04	Quarter 1	Quarter 2	Quarter 3	Quarter 4	2004 total
SALES	475,947	778,822	973,527	1,503,558	3,731,854
COST OF GOODS SOLD	289,032	472,962	591,203	913,080	2,266,277
Gross Profit	186,914	305,859	382,324	590,479	1,465,576
OPERATING EXPENSES:
Salary expenses	172,775	189,307	197,573	505,100	1,064,756
Outside services	6,000	0	0	21,000	27,000
Supplies (office and operating)	80,700	900	900	282,300	364,800
Web Site, IT	4,700	900	900	16,300	22,800
audiologist insurance	3,675	4,375	4,725	12,075	24,850
Repairs and maintenance	1,350	1,350	1,350	4,500	8,550
Advertising	64,253	39,590	36,994	218,719	359,556
Car, delivery and travel	900	900	900	3,000	5,700
Accounting and legal	7,050	1,350	1,350	24,450	34,200
Rent	11,250	11,250	11,250	37,500	71,250
Telephone	900	900	900	3,000	5,700
Utilities	675	675	675	2,250	4,275
Insurance	675	675	675	2,250	4,275
Taxes (real estate, etc.)	900	900	900	3,000	5,700
Losses from Returned Merchandise	6,591	12,675	13,689	20,787	53,742
Total Expenses	376,861	280,214	287,248	1,271,138	2,215,461
Net Profit (Loss)	-189,947	25,645	95,076	-680,660	-749,885

Note errors in “Web Site” and “Accounting and Legal.” These numbers were mistakenly accumulated, but will indeed offset another error made with low office supplies estimate. This problem will be addressed in the February, 2002 edition of this plan.

3^rd Year (2005) Pro Forma Income Statement—

The Ear Store

Fiscal Year Begins 1/04	Quarter 1	Quarter 2	Quarter 3	Quarter 4	2005 total
SALES	3,547,965	7,463,707	7,463,707	7,463,707	25,939,087
COST OF GOODS SOLD	2,154,606	4,532,555	4,532,555	4,532,555	15,752,271
Gross Profit	1,393,359	2,931,152	2,931,152	2,931,152	10,186,816
OPERATING EXPENSES:
Salary expenses	1,335,170	1,561,780	1,561,780	1,561,780	5,905,603
Outside services	39,000	0	0	0	39,000
Supplies (office and operating)	525,600	6,900	6,900	6,900	546,300
Web Site, IT	31,600	6,900	6,900	6,900	52,300
audiologist insurance	28,175	36,225	36,225	36,225	136,850
Repairs and maintenance	10,350	10,350	10,350	10,350	41,400
Advertising	469,889	283,621	283,621	283,621	1,320,752
Car, delivery and travel	6,900	6,900	6,900	6,900	27,600
Accounting and legal	47,400	10,350	10,350	10,350	78,450
Rent	86,250	86,250	86,250	86,250	345,000
Telephone	6,900	6,900	6,900	6,900	27,600
Utilities	5,175	5,175	5,175	5,175	20,700
Insurance	5,175	5,175	5,175	5,175	20,700
Taxes (real estate, etc.)	6,900	6,900	6,900	6,900	27,600
Losses from Returned Merchandise	55,263	104,949	104,949	104,949	370,110
Interest	0	0	0	0
Depreciation	0	0	0	0
Total Expenses	2,760,099	2,202,235	2,202,235	2,202,235	9,366,804
Net Profit (Loss)	-1,366,740	728,917	728,917	728,917	820,013

Pro Forma Cash Flow Statement First Year (2003) by Month—The Ear Store

	Jan-03	Feb-03	Mar-03	Apr-03	May-03	Jun-03	Jul-03	Aug-03	Sep-03	Oct-03	Nov-03	Dec-03	Total Item EST
CASH RECEIPTS
Cash Sales					6,068	8,091	10,114	14,159	18,205	20,228	20,228	20,228	117,321
Collections from CR accounts						24,306	32,408	40,510	56,713	72,917	81,019	81,019	388,892
Collections from insurance								2,077	2,769	3,461	4,846	6,231	19,384
TOTAL CASH RECEIPTS	0	0	0	0	6,068	32,397	42,521	56,746	77,687	96,606	106,093	107,477	525,596
CASH PAID OUT
Purchases (merchandise)				32,845	19,707	26,276	32,845	45,982	59,120	65,689	65,689	65,689	413,842
Gross wages (exact withdrawal)	0	0	0	19,427	19,427	19,427	19,427	23,560	23,560	23,560	23,560	23,560	195,508
Outside services	0	0	0	3,000	0	0	0	0	0	0	0	0	3,000
Supplies (office & oper.)	0	0	0	40,000	100	100	100	100	100	100	100	100	40,800
Website	0	0	0	2,000	100	100	100	100	100	100	100	100	2,800
Audiologist Insurance	0	0	0	1,050			1,400			1,575			4,025
Repairs & maintenance	0	0	0	150	150	150	150	150	150	150	150	150	1,350
Advertising	0	0	0	10,817	8,654	6,490	5,408	4,110	4,110	4,110	4,110	4,110	51,921
Car, delivery & travel	0	0	0	100	100	100	100	100	100	100	100	100	900
Accounting & legal	0	0	0	3,000	150	150	150	150	150	150	150	150	4,200
Rent	0	0	0	1,250	1,250	1,250	1,250	1,250	1,250	1,250	1,250	1,250	11,250
Telephone	0	0	0	100	100	100	100	100	100	100	100	100	900
Utilities	0	0	0	75	75	75	75	75	75	75	75	75	675
Insurance	0	0	0	75	75	75	75	75	75	75	75	75	675
Taxes (real estate, etc.)	0	0	0	100	100	100	100	100	100	100	100	100	900
SUBTOTAL	0	0	0	113,989	49,987	54,393	61,280	75,853	88,991	97,135	95,560	95,560	732,746
Returned Merchandise						2,605	2,605	3,907	3,907	3,907	3,907	3,907	24,744
TOTAL CASH PAID OUT (Disbursements	0	0	0	113,989	49,987	56,998	63,885	79,760	92,898	101,042	99,467	99,467	757,491
Cash Position (end of month)= cash flow	0	0	0	-113,989	-43,919	-24,601	-21,363	-23,014	-15,210	-4,435	6,626	8,011	-231,894
Beginning Balance				250,000	136,011	92,092	67,492	46,128	23,114	7,904	3,469	10,095
Ending Balance				136,011	92,092	67,492	46,128	23,114	7,904	3,469	10,095	18,106	18,1 06

1. 12-month Pro Forma Income Statement Explanation

Sales

Sales of ALDs are based upon a survey by SHHH that indicates more than 90% of hearing aid wearers own some kind of ALD (telephone, television, etc.). Because many of our ALD customers will be current hearing aid owners (i.e. they did not buy hearing aids from us) we feel that our 90% estimate is conservative. Our 80%-20% estimates for disposables and digitals are based upon informal surveys. Audiologist hours are the amount of hours that an audiologist will spend on a particular sale or procedure—always rounded to include overtime and late customers. In the case of digital hearing aids, 2 one-hour follow-up visits are included in the purchase price for adjustments, etc. This is based upon surveys by SHHH indicating that the average customer interaction time with an audiologist is approximately 4 hours including testing time and ear mold time. We feel we are actually giving our customers more time because digital aids are much faster to customize and we are eliminating ear molds. Wax removal is a quick procedure and can be performed well within the 1 hour allotted for the hearing test.

Breakdown for 100 hearing tests

• 100 hearing tests = 75-100 Audiologist Hours
• 80 hearing aids purchased

• 64 Disposable @ 1 hour per = 64 Audiologist Hours
• 16 Digital @ 3 hours per = 48 Audiologist Hours

• 32 repeat customers

• 16 Disposable @ 30 min per = 8 Audiologist Hours
• 16 Digital @ 3 hours per = 48 Audiologist Hours

• 72 ALD = 0 Audiologist Hours
• misc. sales (batteries, musician earplugs, wax removal) = 0 hours

Totals per 100 hearing tests:

80 Disposables sold

32 Digitals sold

72 ALD sold

268 Audiologist Hours

With this distribution, 3 full-time audiologists can easily share 1 testing station and 2 fitting stations over 71 weekly store hours. A fourth part-time audiologist could be added if needed.

Audiologist Capacity

Each store will start with two full-time 40-hour audiologists w/ rotating schedules—by appointment or first-come-first-serve walk-in basis. A third audiologist will be added in the 4^th month of operation to accommodate for ramping of sales and repeat customers. Each store will run close to capacity of 120 Audiology Hours per week.

3 audiologists @ 51 weeks = 6120 Audiology Hours

Breakdown of Audiology Hours:

total hearing tests	2284
total disposables	1827
total digitals	731
total ALD	1644
total Audiology Hours	6120

Sales, Price, and COGS Breakdown

	Price	cost of good	margin	amount sold at "Audiology Capacity"	yearly sales	Sales monthly	Yearly COGS	COGS monthly
hearing tests	$49	$3	$46	2,284	$111,896	$9,325	$6,851	$571
Disposables	$99	$55	$44	1,827	$180,860	$15,072	$100,478	$8,373
Digitals	$1,099	$750	$349	731	$803,090	$66,924	$548,060	$45,672
ear wax removal	$23	$10	$13	457	$10,504	$875	$4,567	$381
Telephone ALDs	$75	$50	$25	822	$61,657	$5,138	$41,104	$3,425
Television	$140	$93	$47	571	$79,925	$6,660	$53,093	$4,424
personal amplifiers	$117	$78	$39	82	$9,618	$802	$6,412	$534
Doorbell/Fire Alert	$105	$70	$35	164	$17,264	$1,439	$11,509	$959
Public Systems	$979	$700	$279	20	$19,580	$1,632	$14,000	$1,167
musician ear plugs	$100	$65	$35	25	$2,500	$208	$1,625	$135
wax removal kits	$10	$5	$5	114	$1,142	$95	$571	$48
Totals					$1,298,036	$108,170	$788,270	$65,689

Cost of Goods Sold (C.O.G.S.)

See above table (1.3) for breakdown. Figures are listed as wholesale prices quoted by each manufacturer plus shipping and credit card charge of approx. 2 percent. ALD prices were averaged over several models within each category.

Operating Expenses

Salaries of Employees

FICA/Benefits, Etc

• 24% of each salary added to cost.

Salaries per Store:

• 2 full - time receptionists/salespeople @ $28,000 each. This covers a 71 hour per week position plus ½ hour open, ½ hour close daily (71+7= 2X39 hours)
• 2 full-time audiologists @ $40,000 each.¹¹
• 1 full-time audiologist added in the 4^th month of operation to allow for ramp-up of business.

Corporate HQ Salaries

• President/CEO salary: $36,000 (50% of $72,000 for sweat equity)
• Assistant to President/CEO (part-time): $16,000

Outside Contracts

PR firm:

To gain free coverage on television, newspaper articles, buzz with seniors organizations, churches, etc. $3000 upon opening of store.

Office Supplies

Office Equipment, Testing and Fitting Equipment:

• Professional Estimate¹²: $25,000

Miscellaneous:

• Modeling the office, outdoor signs, etc.: $15,000 (see store requirements below)

Operating supplies (not included in COGS for hearing tests, etc.)

• Misc. $100 monthly

Repairs and Maintenance

• Misc. $150 monthly

Advertising:

The figure of 3.8% of total sales is congruent with companies such as LensCrafters (3%), Office Depot (3%), Apple Computers (5%) and Wendy’s (4%). We will start at 10% and fluctuate with time of year and holidays.

Car/travel

• $200/mo (estimate)

Legal/accounting

• Trademark, IP consultations $3000
• $200/mo (estimate)

Office Rental

• Professional Estimate¹³ for a location near Great Northern Shopping Center: $15,000 annual ($1250 monthly) for office rental per location with $3000 ($250 monthly) taxes, utilities, insurance and a start-up cost of $15,000 for modeling (see section 3.3.2 above).

Website, IT

• $2000 setup, $100 monthly

R&D

• $500 per month estimate (may be covered by NCIIA grant money)

Audiologist Insurance

• $175 per Audiologist per month

Losses from Returned Merchandise

Hearing Aids

• A customer can return a non-disposable hearing aid up to 45 days for a full refund (not including hearing test). The Ear Store believes that we will keep returns at 5% because of three factors—business model, target market, and client education. Our business model is similar to organizations such as Kaiser Permanente who report a return rate of less than 10 percent due to recommended follow-up visits with audiologists who do not work for a commission. In addition, white males over 45 (our target market) are less likely to return items purchased than their female counterparts. Furthermore, certain private practice audiologists have claimed a return rate of less than 3% and list educating their clients as the main reason for this success. Education is a key factor in the mission statement of The Ear Store.
• A 5% return rate yields approximately 3 per month. Audiologist cost is approx. $75 per return. Add $5 miscellaneous cost and $349 loss from gross margin. Total loss is $429 per return.

ALDs

• A 5% return rate was also assumed for ALDs. A $5 miscellaneous cost was added but no Audiology Hours are lost (see following chart for breakdown).

Monthly Breakdown of Returns

	monthly number of returns	Monthly loss on returns
Digitals	3	$1,287.00
Telephone ALDs	3	$90.00
Television	2	$104.00
personal amplifiers	0	$0.00
Doorbell/Fire Alert	1	$40.00
Totals		$1,521

2. Cash Flow Projection Explanation

Cash In From Sales

Estimate 80% credit card sales, 20 percent cash sales. Credit card money is collected 1 month later, cash immediately. 70% of hearing tests are paid by insurance, which is collected 3 months later. Hearing tests make up 9.1% of sales. Thus 6.4% of sales will be collected 3 months later.

Collection Breakdown for Sales

• 6.4% 3 months from purchase
• 74.9% 1 month from purchase
• 18.7% immediately upon purchase

Purchases

Merchandise

• Terms from manufacturers: Due at end of month.

Other Expenses

• All other expenses are treated as end-of-month payments.
• All insurance payments (real estate, audiologist) are made quarterly.
• All returned merchandise is immediate cash paid out equal to selling price.

3. Years 2 and 3

Time Line for store openings in years 2 and 3.

The following is the time line for opening stores that is reflected in the pro forma statements:

Startup (2003)

2^nd Quarter

May 1 store, Cleveland-West

Phase 2 (2004):

1^st Quarter

January Hire Regional Manager (will eventually move to Pittsburgh stores)

@ $40,000

Unveil new line of “limited wear” and disposable hearing aids.

Expand web site to include mail order devices.

February 1 store in Cleveland-Southeast area

March 1 store in Cleveland-East area

4^th Quarter

October Hire Regional Manager for Cleveland @ $40,000

November 5 Pittsburgh area stores

2 Cleveland Stores

Total: 10 stores, 2 regional managers

Phase 3 (2005):

1^st Quarter

January Add CEO to payroll @ $150,000.

Mr. Caner becomes new CTO @ $85,000.

Add Marketing Director @ $90,000.

Add Operations Director @ $70,000.

Add 2 Regional Mgrs.

February 3 Cincinnati stores

2 Columbus stores

8 Detroit Metropolitan stores

(Total 23 total stores)

Special thanks to the accessories for communications and entertainment for the hard-of-hearing. A licensed audiologist has earned at least a master’s degree in Audiology. An audiogram describes a person’s unique hearing deficiency and is the information that is used to program a hearing aid in order to compensate for that individual’s hearing loss. Audiograms are determined by a certified hearing test. Accessories for communications and entertainment for the hard-of-hearing. A licensed audiologist has earned at least a master’s degree in Audiology. Sonic Innovations had its initial public offering on January 3, 2002 and is the quintessential company for the “new” hearing aid business because of its ability to closely follow high-tech market trends. An audiogram describes a person’s unique hearing deficiency and is the information that is used to program a hearing aid in order to compensate for that individual’s hearing loss. Audiograms are determined by a certified hearing test. See “Market Segmentation” in the next section. Insurance generally pays for hearing tests by audiologists and not hearing aids. Source: Holt, Judith & Hotto, Sue (1994). Demographic aspects of hearing impairment: Questions and answers (3rd edition). Center for Assessment and Demographic Studies, Gallaudet University. Based mostly on the Health Interview Survey 1994. National average starting salary is $38,800. Estimate from Regional Rep—Gordon Stow and Associates.Todd Gabriel, Vice President, Grubb and Ellis.

4. Beyond 3 Years

Phase 4 (2005-2007): 177 more stores in 37 more cities

(Note: Pro forma sheets do not show phase 4)

Total: 200 stores in over 40 cities

5. Break Even Analysis

Break even sales levels are approximately $81,000 per month. This includes 7% interest on initial startup capital of $250,000. This is approximately 75% of projected sales.

6. Sources and Applications of Funds Statement

Time line of acquired capital:

Startup Grants, Business Plan Competitions, Personal savings $ 90,000

Family, Advisors, Directors $ 30,000

Angel Capital $ 130,000

Phase 2 Angel Capital $ 430,000

Phase 3 Early Stage Venture Capital $4,500,000

Phase 4 Growth Stage Venture Capital $40,000,000

Production Plan

1. Commercialization Requirements and Feasibility

The Ear Store has not made specific plans to set up a manufacturing operation, although we believe it will not be difficult as indicative of the plethora of manufacturing dispensers currently in existence in the United States. As a conservative measure, The Ear Store is currently considering a strategic partnership with existing manufacturers to achieve its goals.

Organizational Plan

1. Form of Ownership

The Ear Store is currently listed with the Internal Revenue Service as a sole proprietorship. The company intends to form an S corporation in 2002.

2. Principal Shareholders (Board of Directors)

Currently only members of the Board of Directors are investors and subsequent shareholders:

Edward York, President and CEO, The Ear Store

Yori Hiro., Mixon Chair for Entrepreneurship Studies, Weatherhead School of Management

Dr. Foy McGhee,, Director, Physics Entrepreneurship Program, Case Western Reserve University

3. Authority of Principals

The following organizational chart describes the current authority of the principals.

4. Board of Advisors

The Ear Store has a Board of Advisors that consists of qualified individuals who have been providing their expertise to the Company in return for a deferred compensation of no more than $75 per hour and an equity stake when the Company goes public. The Board of Advisors’ function is to serve in an advisory capacity for the various operations and activities of the Company. The board of advisors for the Ear Store is unique in that it contains individuals whose personal objectives to those of the company, thus eliciting top performance from these individuals. The Board of Advisors includes:

John Fleischer, Director, gedas (IT division of Volkswagen Corporation of America)

Joseph E. Caner, President, Lakeside on Lake Erie Board of Directors

Mary K. Westbrook, M.A., CCC-A, 7-year Owner, Listening Advantage, Cleveland, OH; Clinical Coordinator of Audiology, Cleveland State University (1993-1996)

Barbara Caner, 15-year National Delegate, Self Help for Hard of Hearing (SHHH), Cuyahoga County Commissioner’s Panel for Hearing Disabilities

Steve Weber, EE, MBA, Project Engineer, Fuji Medical Systems

5. Roles and Responsibilities of Members of Organization

5.1 President and CEO

At the current stage in the development of The Ear Store, Mr. Caner’s primary roles and responsibilities include the following: 1) Assemble a management and investment team that will effectively carry out the goals of the company. 2) Maintain this business plan as a living document under the close scrutiny of the Boards of Directors and Advisors; 3) Remain up-to-date concerning all hearing aid industry trends, including acting upon all potential proprietary technologies and activities.

5.1.1 Regional Managers

See Operation Plan.

6. Hiring Time Line

In Phase 3 Mr. Caner intends to take exit the roll or CEO and become Chief Technical Officer.

Operation Plan

1. Summary of Operation

Technological trends in the hearing aid business are creating lower prices, higher quality sound, and less interaction time with professionals, but few businesses are set up to operate under this new paradigm. As a result, the plummeting cost of hearing aid production is not paralleled by a drop in consumer price, which remains relatively high. The Ear Store intends to embrace this paradigm shift and set the standard for hearing aid prices through aggressive wholesale purchasing and marketing.

2. Description of Company’s Operation

Each Ear Store will operate very much like a private practice audiologist, except with the addition of walk-in customers. A receptionist/salesperson answers the phone, makes appointments, coordinates walk-in customers, takes care of payments, maintains office records and inventory, and assists in the sale of ALDs. Each audiologist will perform “standard” duties such as audiological assessments, otoacoustic emissions testing, consultation, audiological rehabilitation, and hearing aid fitting. Each branch will have a Chief Audiologist, a rotating position that will oversee basic store operations. A regional manager will oversee the operations of multiple stores in a particular region.

2.1 Normal Customer Flow

Customer makes appointment for a hearing test either by phone or in person on a first-come-first-serve basis. A “fully-cognizant adult” hearing test takes approximately 30 minutes. Many health insurances pay for this exam. The test is followed by a short consultation in which the audiologist may recommend a hearing aid. The audiologist is also qualified to refer the customer to a physician in the rare cases where one is needed. The hearing test is not covered in the price of a hearing aid.

3. Hours of operation:

10-9 Monday-Saturday

12-5 Sunday

total: 71 hours

3.1 Flow of Orders and Goods

Each Ear Store location will enter goods sold (via scanner, etc.) into local computer that is connected to the common Ear Store IT network. The central office in Cleveland then handles inventory, purchasing, factory monitoring for backorders, etc. Factories will send goods directly to each Ear Store location, which is current practice in the hearing aid industry. Each Ear Store location will then enter shipping receipts into computer and perform bi-weekly inventory checks to match computer numbers.

3.2 Organizational Charts