Audiotech Healthcare Corp. has provided its financial results for the six-month period ended March 31, 2007.

Total revenues for the second quarter ended March 31, 2007, were $1,068,946, an increase of 10 per cent over the same quarter in fiscal 2006 and up 14 per cent over the revenues reported during the first quarter of the current fiscal year. Revenues for the quarter were just shy of the corporation's all-time quarterly sales record.

Once again, growth was achieved in both the Canadian and United States divisions. Revenues from the company's Canadian operations totalled $709,114 compared with $645,406 during the first quarter and $686,718 during the second quarter of fiscal 2006. Most notable during the quarter was the continued strong growth in the company's U.S. clinic operations which posted a 26-per-cent increase in revenues during the second quarter as compared with the same period a year ago and a 23-per-cent increase over the prior quarter. Revenues from U.S. clinics were $359,832, representing 34 per cent of corporate revenues for the quarter.

For the six-month period ended March 31, 2007, the company is pleased to report record revenues of $2,006,861, an increase of 13 per cent over the same two quarters in fiscal 2006. Canadian and U.S. operations contributed growth of 8 per cent and 26 per cent, respectively. The strong organic growth is attributed to the new clinics opened in Canada during the past year and the positive results achieved as a result of the opening of the flagship regional hearing and balance centre in Idaho Falls last year.

                    Three months ended March 31,  Six months ended March 31,                
                            2007         2006           2007         2006

Canadian revenues      $  709,114     $686,718       $1,354,520  $1,254,596
U.S. revenues             359,832      286,259          652,341     519,411
Total revenues          1,068,946      972,977        2,006,861   1,774,007
Operating cash flow        99,907      135,322          149,812     169,758
Net earnings               64,049      101,969           81,049     106,116
Earnings per share (basic 
and fully diluted)         0.0048       0.0076           0.0061      0.0078

Gross margins continue to meet expectations, rising from 68.6 per cent of sales during the second quarter of fiscal 2006 to 69.3 per cent for the quarter ended March 31, 2007. Gross margins were 69.7 per cent during the first two quarters of fiscal 2007. Management remains confident that the factors that have contributed to the strong gross margins reported by the company over the past two years will continue into the foreseeable future.

As a result of the opening of the Victoria clinic and the relocation the northwest Calgary clinic during the first quarter, most direct clinic-expense categories saw modest increases during the second quarter compared with previous reporting periods. Furthermore, during the second quarter, the company expanded its south Kamloops clinic to expand service capacity and to facilitate continuing training of staff for all clinic operations (see below for more details). Included in these expenses are certain on-time costs associated with these initiatives as well as investments that are expected to deliver revenues in upcoming quarters. As expected, direct clinic costs as a percentage of sales declined from 54 per cent during the first quarter to 50 per cent during the second quarter as a result of a more meaningful contribution to revenues from the newer clinics. Direct clinic operating costs for the quarter were $534,762 compared with $443,090 during the second quarter of fiscal 2006. This represents an increase of 21 per cent.

General and administrative expenses totalled $136,931 during the quarter which compares favourably with the average quarterly general and administrative expense for fiscal 2006, which was just over $133,000 despite additional investments in infrastructure. As expected, general and administrative costs have declined as a percentage of sales during fiscal 2007. G&A costs have dropped from 14.5 per cent of sales during fiscal 2006 to 13.5 per cent during the first quarter and to 12.8 per cent during the second quarter of fiscal 2007.

Audiotech is pleased to announce earnings of $64,049 or 0.48 cent per share for the second quarter ended March 31, 2007. Earnings for the first two quarters of fiscal 2007 were $81,049 or 0.61 per share.

Effective Oct. 1, 2006, Audiotech's two principal Canadian operating subsidiaries were amalgamated. The amalgamation will afford the consolidated company greater tax-planning opportunities and the ability to better use loss carry forwards in fiscal 2007 and beyond to reduce the consolidated corporate income tax liability. Accordingly, Audiotech expects a more favourable tax position in fiscal 2007 than was experienced in fiscal 2006, and no provision for income taxes has been applied during the first or second quarters.

During the six months ended March 31, 2007, a total of $10,630 in amortization related to the debenture discount was recorded on the statement of income thereby reducing net earnings by the same amount ($12,750 for the same quarters in fiscal 2006). Since the convertible debentures from which the debenture discount originated were completely repaid during the second quarter, this non-cash expense will not impact future financial results.

Details of all expenses can be found in the unaudited interim consolidated financial statements for the period ended March 31, 2007.

Future outlook

Management's revenue and profit outlook for fiscal 2007 and beyond remains favourable.

Over the past several years, management has aggressively sought new acquisition opportunities to expand the company's business as part of its overall consolidation strategy. A change in the competitive environment in the hearing aid industry has forced major hearing aid manufacturers into the acquisition/consolidation market as a means of increasing or maintaining their market share. This has had the effect of increasing the prices of acquisition opportunities in the industry to a point where growth through acquisitions is less attractive to Audiotech. Accordingly, despite lengthy and continuing negotiations with several potential targets over the past two years, the company has not been successful in completing an acquisition on terms that would be attractive for the company from a profitability and risk management standpoint. These efforts have consumed management time and significant due-diligence costs. To compound this problem, acquisition opportunities that are arising are typically operations run by owner/managers that are looking to retire. Given the prevailing shortage of graduating audiologists, staffing these operations once the owner/manager retires following an acquisition is a very real concern.

The board of directors of the company has determined that, to counteract these trends in the interest of ensuring continued profitable growth for Audiotech, it will continue to shift the emphasis of its growth program to the expansion of existing clinics and the opening of new clinics within the Pacific Northwest United States and Western Canada. Management will continue to review acquisition opportunities as they arise; however, the acquisition strategy will become secondary to organic growth initiatives. New clinics will be a mix of full stand-alone operations and satellites of existing clinics. The initial examples of this program, including the new Vernon location, the recently expanded northwest Calgary location and the new Victoria clinic, are initial steps in this regard. Based on the success of the regional hearing and balance centre in Idaho Falls, additional opportunities to create similar operations in other U.S. markets will also continue to be explored.

In harmony with this new strategic focus, during the second quarter, the company completed a renovation and expansion of its south Kamloops clinic. The project more than doubled clinic space and has greatly increased operational efficiencies. Wait times have declined considerably and patient visits have been increased. In addition to increasing service capacity, the clinic was also upgraded to facilitate staff training as part of an internal career development program whereby the company will train its own hearing instrument specialists over the coming years to help overcome the present shortage of qualified audiologists. Hearing instrument specialist trainees, both during and after their courses, take their practicum and additional training on site under the supervision of vice-president and chief operations manager Canada Dan Allen, BSc, MAIS, CCC-A, audiologist. The company currently has three trainees in the program, two of which are in the first year of a two-year program through Grant MacEwan College and the third who is preparing for the government licensing exams this fall. These trainees will provide additional manpower to support future clinic start-ups and expansion of existing clinic capacity. Administrative support staff and technicians, who act in a support role to the audiologists and hearing instrument specialists, are also to be trained at this location.

It should be noted that the same phenomena that have made growth through acquisitions less attractive have created a situation where Audiotech has become an attractive acquisition candidate itself for a hearing aid manufacturer, major clinic operator or equity fund. By continuing to expand the revenue and client base of its existing clinics and leveraging its expertise in the start-up of new clinics within its region of geographic focus, management is confident that the company can continue to create shareholder value and that this growth strategy will ultimately be rewarded either through increased operating profits or a higher valuation in the event that Audiotech is acquired.

The company will continue to build upon its close relationships with large hearing aid manufacturers and its financial partners to finance the organic growth program. Of course, the company will also continue to reinvest its positive cash flow in new growth initiatives as well.

Liquidity and financial resources

As at March 31, 2007, Audiotech had a cash balance of $478,110.

Working capital was negative $23,172 as a result of the reclassification of certain long-term liabilities during the latter half of fiscal 2006 as short term (current liabilities) as repayment of these liabilities is now scheduled within the next 12 months.

During the second quarter, the expiring convertible debentures totalling $243,995 were refinanced by promissory notes bearing interest at 8 per cent per year with varying terms. In addition to reducing the effective interest rate of this debt significantly, the restructuring of this debt will eliminate the continuing non-cash charge against earnings each quarter related to the amortization of the debenture discount.

A portion of the convertible debentures was refinanced under short-term arrangements with a maturity in June, 2007, as this debt is expected to be replaced with financing from another long-term financial partner of the company as part of the refinancing of a promissory note which matures at that time. A total of $276,940 is expected to be refinanced as part of this final tranche. Following the completion of this final tranche of debt refinancing, management expects that the maturities of the corporation's long-term debt will be such that the working capital ratio shall improve and return to historical levels.

Accordingly, management is very confident that the company's working capital position is sufficient to meet its needs. Investments have and will continue to be made in new and additional equipment as new clinics are opened or upgraded. Such expenditures will be financed from existing working capital, capital leases or through financing arrangements with key hearing aid suppliers as appropriate under the circumstances. The company may undertake an equity financing in the near future to accelerate the company's debt retirement goals and to reduce future interest costs.

Details of all long-term debt and capital lease obligations as well as debt repayments and other financial commitments due during the next five years are disclosed in the notes to the consolidated financial statements for the period.

During the quarter, the company received gross proceeds of $261,000 from the new promissory notes as discussed above. These notes were used to retire the company's convertible debentures which matured during the period. This brings the total year-to-date proceeds from new debt financing to $311,000. A total of $293,368 in long-term debt, principally the convertible debentures, was repaid during the quarter. The $325,347 in long-term debt has now been repaid during the six months ended March 31, 2007. An additional $11,735 in long-term capital leases were also repaid ($5,996 during the second quarter). As a result of these transactions, there was a net reduction in long-term debt during the second quarter of fiscal 2007 of $38,364 ($26,082 for the first half of fiscal 2007). The net reduction in long-term debt during fiscal 2007 has been financed out of cash flow.

As at March 31, 2007, Audiotech had 13,229,825 common shares issued and outstanding with a book value of $1,750,340. No common shares were issued during the quarter.

As at March 31, 2007, there were 650,000 options to acquire common shares outstanding with a weighted average exercise price of 20 cents (range of 16 cents to 28 cents). The 200,000 options with an exercise price of 28 cents per share are scheduled to expire on June 9, 2007. Subsequent to this date, there will be 450,000 options outstanding, all with an exercise price of 16 cents per share. These options expire on May 18, 2009.