Audiotech Healthcare Corp. had record revenues and another solidly profitable quarter.

Total revenues for the third quarter ended June 30, 2011, were a record $1,435,942, an increase of 7.4 per cent over the sales posted during the same period a year earlier. Revenues from the Canadian operations posted an increase of 5.9 per cent, rising from $968,046 during the third quarter of fiscal 2010 to $1,024,966 in the current quarter. Sales from the U.S. clinics during the third quarter were $410,976, an increase of 11.3 per cent over the same quarter in the prior fiscal year despite an unfavourable shift in exchange rates. The average exchange rate during the third quarter of fiscal 2011 was only one U.S. dollar to 96.8 cents compared with one U.S. dollar to $1.028 during the comparable quarter last year. Total revenues for the nine months ended June 30, 2011, were $4,036,682, an increase of 6.7 per cent over the $3,782,271, reported during the first nine months of the prior fiscal year. For the first three quarters of fiscal 2011, the Canadian and U.S. operations both reported revenue growth.

                                STATEMENT OF INCOME

                          Three months ended June 30,      Nine months ended June 30,
                                2011            2010            2011            2010

Canadian revenues        $ 1,024,966      $  968,046     $ 2,957,715     $ 2,703,793
U.S. revenues                410,976         369,195       1,078,967       1,078,478
Total revenues           $ 1,435,942     $ 1,337,241     $ 4,036,682     $ 3,782,271
Operating cash flow          137,977         173,376         404,521         315,090
Net earnings                 159,862         140,633         398,264         214,630
Earnings per share
(basic)                       0.0121          0.0106          0.0301          0.0160

Gross margins of 67.9 per cent during the third quarter were slightly below the long-term historical average due to a less favourable product mix and seasonal promotional programs which beneficially pushed strong organic revenue growth. This compares with 69.7 per cent in fiscal 2010 and the long-term (five-year) average of 68.6 per cent. While slightly below initial targets, the change in gross margins experienced during the quarter was within the expected range that would be anticipated with typical day-to-day minor variations in the mix of product sold given the promotional programs that were undertaken during the quarter. Such day-to-day variations can occur as a result of special promotions of lower-margin products and a variation in the ratio of private hearing aid sales versus those subsidized by various health care programs. Additionally, newer clinic operations often exhibit lower gross margins than well-established clinics due to their lower product volumes, as well as incentive programs and sales discounts offered to establish a position in a new marketplace. Over the past five years, the company has generally achieved steadily increasing gross margins as a result of the negotiation of bulk purchasing agreements with major hearing aid manufacturers. The greater number of new clinics operating during fiscal 2008 contributed to the temporary decline in margins in fiscal 2008. Management expects gross margins to range from approximately 68 per cent to 70 per cent during the remainder of fiscal 2011.

Direct clinic costs, which include selling and advertising costs, rent and clinic overheads, clinic labour costs, and amortization of audiology equipment, increased by 3.9 per cent during the third quarter of fiscal 2011 as compared with the same quarter a year ago. Selling expenses increased by 8.5 per cent to support advertising initiatives undertaken during the quarter. Salaries and benefits increased 5.1 per cent, whereas amortization declined by 7.1 per cent. Direct clinic costs as a percentage of sales continue to decrease, declining from 48.5 per cent in the third quarter of fiscal 2010 to only 46.9 per cent during the current quarter. For the first nine months of fiscal 2011, direct clinic costs declined by 2.4 per cent.

General and administrative expenses totalled $139,492 for the quarter, an increase of 4.0 per cent from the $134,148 reported during the third quarter of fiscal 2010. The increase on a year-over-year basis was primarily due to an increase in salaries and benefits. General and administrative costs as a percentage of sales were 9.7 per cent during the quarter, down from 10.0 per cent in the comparative quarter a year ago.

Operating income before other items and income taxes totalled $162,139 for the quarter, an increase of 15.3 per cent over the third quarter of fiscal 2010. For the nine months ended June 30, 2011, operating income before other items and income taxes was $438,111, up 104.1 per cent from the $214,630 reported during the comparable period in fiscal 2010.

In late June, 2011, the company's U.S. operating subsidiary entered into a sales/leaseback transaction whereby it sold its land and building in Idaho Falls for gross proceeds of $435,000 (U.S.). The subsidiary has entered into a long-term agreement to lease the building from the purchaser and will continue its operations in the location. The proceeds from the sale were used to repay the outstanding balance remaining on the original building loan of $230,533 (U.S.). The remaining proceeds will be used to accelerate debt repayment during the fourth quarter and beyond, including the repayment of a $50,000 promissory note that matures in October, 2011, as well as one or more of the other longer-term 8-per-cent promissory notes. The company recorded a pretax gain on the sale of the building in the amount of $52,257 during the third quarter.

After the gain on the sale of the building, pretax net income was $214,396 for the third quarter, an increase of 52.5 per cent on a year-over-year basis. Pretax net income for the nine months ended June 30, 2011, was $489,673 compared with $214,630 during the first three quarters of fiscal 2010, an increase of 128.1 per cent.

During the first quarter of fiscal 2011, the company's remaining tax loss carry forward were utilized and applied against taxable income. The company's net income significantly exceeded the tax loss carry forward available. Accordingly, a provision for current income taxes of $35,925 was recorded during the first quarter. As a result of the company's continued strong profitability and on the advice of its external auditor, during the second quarter, the company recognized a $33,888 future tax asset related to timing differences originating from goodwill and fixed asset amortization rates for accounting and tax purposes. The recognition of this future tax asset was applied against a provision for current income taxes during the second quarter of $34,838, resulting in a net income tax provision of $950. During the third quarter, a current income tax provision of $54,534 was recorded, bringing the total net tax provision for the first three quarters of fiscal 2011 to $91,409.

The company is pleased to report net income of $159,862 or 1.21 cents per share for the third quarter of fiscal 2011. This compares with earnings of $140,633 during the corresponding quarter in fiscal 2010. Net income for the first three quarters of fiscal 2011 totalled $398,264 or 3.01 cents per share, an increase of 85.6 per cent over the comparative period in fiscal 2010.

Operating cash flow for the quarter remained strong at $137,977, bringing the total operating cash flow for the nine-month period ended June 30, 2011, to $404,521. The represents an increase of 28.4 per cent compared with the first three quarters of fiscal 2010.

As a result of a $4,284 cumulative translation adjustment resulting from the depreciation of the U.S. dollar during the quarter, comprehensive income for the period was $155,578 compared with $159,212 in third quarter of fiscal 2010, when a positive currency translation adjustment of $18,579 was recorded. For the nine-month period ended June 30, 2011, comprehensive income was $367,887 compared with $213,476 during the same period a year ago.

Details of all expenses can be found in the unaudited financial statements for the nine-month period ended June 30, 2011.

Trailing 12-month performance measures (July 1, 2010, to June 30, 2011):

• Revenues -- $5,354,493;
• Operating cash flow -- $579,006;
• Pretax net income -- $627,766;
• Net income -- $537,709;
• Basic earnings per share -- 4.06 cents.

Liquidity and accelerated debt repayment

As at June 30, 2011, Audiotech had a cash balance of $998,340, an increase of $420,356 since the beginning of the fiscal year. Working capital increased to $949,877. Management is confident that the company has sufficient working capital to meet its short-term and long-term needs, growth requirements, and accelerated debt repayment plans for the foreseeable future.

A total reduction in long-term debt and long-term capital leases of $304,617 was achieved during the third quarter of fiscal 2011, bringing the total to date in fiscal 2011 to $411,997. This represents roughly 30 per cent of the long-term debt and capital leases (current and long-term portion) outstanding at the beginning of the fiscal year.

During the third quarter ended June 30, 2011, Audiotech repaid the $35,000 promissory note that was scheduled to mature in August, 2011. Further, in late June, the company's U.S. operating subsidiary entered into a sales/leaseback transaction whereby it sold its land and building in Idaho Falls for gross proceeds of $435,000 (U.S.). The subsidiary has entered into a long-term agreement to lease the building from the purchaser and will continue its operations in the location. The proceeds from the sale were used to repay the outstanding balance remaining on the original building loan of $230,533 (U.S.).

All of the debt repayment initiatives have been undertaken without compromising working capital available for day-to-day operations and growth initiatives. It should be noted that none of the corporation's debt carries early payment penalties. Management believes that the accelerated debt repayment will not only reduce interest costs, thereby enhancing profitability, but that the resulting enhancement to key financial ratios will be appealing to potential investors and large consolidators in the industry which may wish to acquire the company to expand their market share. The remaining proceeds from the building sale will be used to accelerate debt repayment during the fourth quarter and beyond, including the repayment of a $50,000 promissory note that matures in October, 2011, as well as one or more of the other longer-term 8-per-cent promissory notes. In total, Audiotech expects to repay approximately an additional $100,000 to $120,000 in long-term debt during the fourth quarter. Depending on the company's working capital needs to finance further growth initiatives, management intends to use a significant proportion of cash flow from operations to reduce debt in fiscal 2012. Management and the board of directors have established a goal of eliminating long-term debt within the next two to three years.