Audiotech Healthcare Corp. has released its operating results for the nine-month period ended June 30, 2004, and its third consecutive quarterly profit.

Audiotech achieved record revenues of $965,954 for the third quarter of fiscal 2004 (three months ended June 30, 2004), an increased of 18 per cent of the revenues posted during the corresponding quarter in fiscal 2003 and 22 per cent over the revenues generated during the second quarter ended March 31, 2004.

The increase in revenues can be attributed to strong growth at the company's Canadian clinic operations as a result of recent marketing efforts, the hiring of additional audiology staff and the opening of the new clinic in Vernon, B.C. Revenues at Audiotech's Canadian operations surged more than 44 per cent to $629,278 during the third quarter, up from $436,184 posted during the same quarter a year earlier. Canadian revenues also compare favourably with the second quarter of the current fiscal year, showing an increase of more than 24 per cent.

Revenues from the company's United States operations remained strong, but as has been the case for all of fiscal 2004, were negatively impacted by the severe depreciation of the United States dollar over the past 12 to 15 months. As measured in United States dollars, the United States clinic operations continued to post significant organic growth, however, after conversion to Canadian dollars for consolidated financial reporting, revenues showed a small decrease of 12 per cent over the same quarter a year earlier. On a more positive note, revenues from the United States clinics for the third quarter of fiscal 2004 of $336,676 increased 17 per cent over the quarter ended March 31, 2004. The recently opened Blackfoot, Idaho, clinic is expected to begin contributing more significantly to United States clinic sales in upcoming quarters.

        STATEMENT OF INCOME
     Three months ended June 30

                      2004         2003
Canadian 
revenues        $  629,278  $   436,184

United States 
revenues           336,676      383,466

Total 
revenues           965,954      819,650

Net earnings 
(loss)               1,309       87,207

Earnings 
per share 
basic           $   0.0001   $   0.0065

Earnings 
per share 
fully 
diluted         $   0.0001   $   0.0062

        STATEMENT OF INCOME
     Nine months ended June 30

                      2004         2003
Canadian 
revenues        $1,578,851   $1,252,489

United States 
revenues           958,064    1,066,834

Total 
revenues         2,536,915    2,319,323

Net earnings 
(loss)              47,379        9,379

Earnings 
per share 
basic           $   0.0036   $   0.0007

Earnings 
per share 
fully 
diluted         $   0.0034   $   0.0007

For the first three quarters of fiscal 2004, Audiotech generated total revenues of $2,536,915, an increase of roughly 10 per cent over the same period of fiscal 2003. Had the Canadian dollar not appreciated so strongly against the United States greenback during the past 12 to 15 months, a significantly higher growth rate would have been reported.

Gross margins during the third quarter were on par with the long-term average at 58.5 per cent, but below the exceptional 61.8 per cent posted during the same quarter in fiscal 2003. The change in gross margins over the same quarter a year earlier is attributed to a different sales mix of private sales and third party sales (billed to a third party insurer).

As expected, operating costs increased to $563,684 during the quarter as a result of additional overhead and wages associated with newly opened clinics, and higher marketing costs. There were also several one-time costs associated with the new clinic start-ups as well as the relocation of one of the company's Calgary, Alta., clinics. All cost increases were in line with expectations and internal forecasts. Due to the accounting treatment of the recently renewed convertible debentures, as recommended by its auditor, Audiotech has recorded a provision of $15,250 during the third quarter representing the amortization of the debenture discount. This is a non-cash expense. This is reported as a separate line item under "other expenses" on the income statement. This accounting policy and transaction are discussed further below.

Earnings before interest, taxes, depreciation, and amortization for the three months of ended June 30, 2004, were $55,105 or 0.4 cent per share.

Despite the start-up costs associated with the new clinic start-ups, the negative impact of the United States dollar's depreciation on its United States clinic operations, and the recording of the debenture discount amortization during the quarter, Audiotech remained profitable during the quarter. Management expects profitability to increase as newly opened clinics begin to contribute additional revenues and as the benefits of marketing initiatives undertaken during the third quarter are realized (there is generally a 30- to 60-day lag between the release of new advertising and the realization of revenues). At the end of the quarter, the company had a record level of deferred revenue (customer deposits received for hearing aids purchased, but not yet delivered or fitted to the patient) for which sales revenue will be recorded during the fourth quarter.

In accordance with the corporation's goodwill valuation policies, management has evaluated the carrying value of the goodwill of each of its operating business units as at June 30, 2004, and found that no impairments requiring amortization or write-off of goodwill exist, and accordingly, none were recorded during the current fiscal period.

Liquidity and financial resources

During the quarter, several major initiatives were undertaken with respect to the refinancing of the remaining long-term debt under more favourable terms.

On April 8, 2004, Audiotech completed a convertible debenture financing in the amount of $659,000. The convertible debentures bear interest at a rate of 10 per cent per year and mature three years from the date of issue. Of the proceeds derived from the financing, $409,029 represented the renewal of expired or expiring debentures. The remaining $249,971 was received from existing debentureholders that increased their investment, or from new investors. The debentures are convertible, at the option of the debentureholder, at any time before the maturity date at a conversion price of 20 cents of debt per share during the initial year, 22 cents of debt per share during the second year, and 25 cents of debt per share during the third and final year of the debenture term.

In total, approximately $581,000 of the proceeds of the debenture financing were immediately used to discharge all of Audiotech's obligations under matured or maturing convertible debenture debt (including the $409,029 in renewals from holders of the maturing debentures and about $24,803 that had been repaid prior to March 31, 2004). The balance will be used to enhance general corporate working capital, and to finance possible future acquisitions and other growth initiatives.

In accordance with generally accepted accounting principals (GAAP), convertible debentures include both a debt and equity component. The equity component of the convertible debentures is estimated using the Black-Scholes model for convertible securities/options valuation and is based on the three-year average volatility of Audiotech's stock price, the average exercise price of the debenture conversion over their three-year life and a risk-free interest rate of 2.46 per cent. As a result, $183,000 has been recorded as other paid in capital (equity) on the balance sheet as opposed to long-term debt. This amount will be amortized at a rate of $15,250 per quarter, a provision for which is included in the current period as a non-cash expense. It is management's opinion that the use of a three-year average volatility calculation for the determination of the equity component of the debentures, as recommended by the company's auditors, may not be the most appropriate. Accordingly, it has engaged the audit committee to review this calculation with the auditors to determine if another period might be more appropriate. Any resulting adjustments will be reported during the fourth quarter.

Also during the quarter, Audiotech entered into a multifaceted agreement with a major hearing aid manufacturer. Under the agreement, the hearing aid manufacturer provided Audiotech with an initial advance from a term credit facility in the amount of $250,000 on April 15, 2004. The loan bears interest at 5.5 per cent per year. A total of $158,000 of the proceeds have been applied to the reduction of outstanding promissory notes. These promissory notes bore interest at 10 per cent, therefore, future interest costs have been reduced substantially. The remainder of the proceeds will be used for marketing and for expansion either through new clinic openings or acquisitions.

As at Dec. 31, 2003, Audiotech had a cash balance of $571,793, including term deposits in the amount of $15,673, compared with $355,548 as at the beginning of fiscal 2004. As a result of the above-noted financings, Audiotech's working capital position has improved dramatically from a deficit of roughly $380,000 as at Sept. 31, 2003, to a surplus of $341,000 at the end of the third quarter of fiscal 2004.

Management is very confident that existing cash resources and operating cash flow will be sufficient to meet all debt repayment obligations, as well as the corporation's accelerated debt retirement goals and growth plans.

Capital purchases of clinic equipment totalling $7,646 were made during the quarter. The audit committee has been engaged to review the company's accounting policies with respect to the amortization of clinic equipment which to date has been depreciated on a declining balance basis at a rate of 20 per cent per year. This equipment typically has a far longer life and residual value than is currently estimated by this level of depreciation. Accordingly, the audit committee will be considering a change to the amortization rate that more accurately reflect the actual rate of depreciation of this equipment. Any adjustments that are necessary will be reported during the fourth quarter.

No share issuances were made during the quarter.

Future outlook

Management is optimistic that the recent addition of further professional staff in Canada, the opening of the Vernon and Blackfoot clinics in March, 2004, and the relocation of the southwest Calgary clinic in April, 2004, will continue to fuel revenue growth in upcoming quarters. Audiotech intends to continue to grow its clinic base in both Canada and the United States through both acquisitions and start-ups, and the expansion of its existing clinics as opportunities arise. Further announcements with respect to growth initiatives are expected in September, 2004.