<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period April 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
PROTECH COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-3281593
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
3311 INDUSTRIAL 25TH STREET, FORT PIERCE, FLORIDA 34946
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(561)464-5100
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes_X_ NO___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Number of Shares Outstanding
on June 13, 1997
Common stock, Par Value $.001 Per Share 4,054,000
Transitional Small Business Disclosure Format: Yes No X
---- ----
<PAGE> 2
PROTECH COMMUNICATIONS, INC.
Index
<TABLE>
<CAPTION>
Part 1 Financial Information Page
Item 1 Financial Statements
<S> <C>
Balance Sheet at April 30, 1997 3
(unaudited)
Income Statement 4
for the Three months ended April 30
1997 and 1996 (Unaudited)
Income Statement 5
for the Six months ended April 30
1997 and 1996 (Unaudited)
Statement of Cash Flows 6
for the three months ended April 30
1997 and 1996 (Unaudited)
Statement of Cash Flows 7
for the Six months ended April 30
1997 and 1996 (Unaudited)
Statement of Stockholder's Equity 8
for the Six months ended April 30
1997 (Unaudited)
Notes to Financial Statements 9
(Unaudited)
Item 2
Management's Discussion and 18
Plan of Operation for the period
January 1, 1997 - April 30, 1997
Management's Discussion and
Plan of Operation for the period
January 1, 1997 - April 30 1997
SIGNATURES 20
Item 3 Exhibits
Exhibit 27 Financial Data Schedule
(FOR SEC USE ONLY)
</TABLE>
<PAGE> 3
PROTECH COMMUNICATIONS, INC.
Balance Sheet and Statement of Equity
April 30, 1997 and April 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 1997 1996
---------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 516,808 693,720
Accounts receivable less allowance for doubtful
accounts of $9,141 and $19,382 in 1997 and 1996,
respectively 114,360 125,725
Inventory (NOTE 2) 222,288 119,191
Deposits being held 0 500
Due from officers and employees 28,997 15,000
Other current assets 11,611 777
---------- ---------
Total current assets 894,064 954,913
Net property and equipment(note 3) 148,361 113,807
Total Assets $1,042,425 1,068,720
========== =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable (note 4) 14,590 6,709
Accrued expenses (note 5) 38,129 5,363
---------- ---------
Total current liabilities 52,719 12,072
Stockholder's Equity: (note 6)
Common Stock, $.001 par value, authorized 10,000,000
shares, issued and outstanding 4,054,000 and
3,964,000 shares in 1997 and 1996, respectively 4,054 3,964
Additional Paid in Capital 962,268 971,727
Retained Earnings 10,127 71,679
Current period Profit 13,257 9,278
---------- ---------
Total Stockholders' Equity 989,706 1,056,648
Commitments (note 8) -- --
---------- ---------
$1,042,425 1,068,720
========== =========
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
PROTECH COMMUNICATIONS, INC.
Statement of Operations
3 months ended April 30, 1997 and 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- -------
<S> <C> <C>
Net Sales (note 11) $ 205,987 204,625
Cost of Goods Sold 61,412 64,586
---------- -------
Gross Profit 144,575 140,039
Selling, general and administrative expenses 135,656 119,308
Provision for doubtful accounts 0 (2,698)
---------- -------
Income from operations 8,919 23,429
Other income (expense):
Interest income 6,678 7,124
Interest expense 0 (13,868)
Miscellaneous income 0 0
---------- ---------
Income before income taxes 15,597 16,685
Income taxes 2,340 7,407
Net Income $ 13,257 9,278
========== =========
Income(loss) per common share $ 0 0
========== =========
Average common shares outstanding 4,054,000 3,964,000
========== =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
PROTECH COMMUNICATIONS, INC.
Statement of Operations
6 months ended April 30, 1997 and 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Net Sales (note 11) $ 389,892 391,313
Cost of Goods Sold 121,076 139,803
----------- ---------
Gross Profit 268,816 251,510
Selling, general and administrative expenses 299,137 201,437
Provision for doubtful accounts 0 (2,698)
----------- ---------
Income (Loss) from operations (30,321) 52,771
Other income (expense):
Interest income 12,607 12,908
Interest expense 0 (13,868)
----------- ---------
Income (Loss) before income taxes (17,714) 51,811
Income taxes 2,340 14,813
Net Income (Loss) $ (20,054) 36,998
=========== =========
Income(loss) per common share $ 0 0
=========== =========
Average common shares outstanding 4,054,000 3,964,000
=========== =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
PROTECH COMMUNICATIONS, INC.
Statement of Cash Flows For the 3 months ended
April 30, 1997 and April 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Cash received from sale of merchandise $ 215,366 200,655
Cash paid to vendors and employees (202,817) (209,010)
Interest paid -- (13,868)
Interest received 6,678 7,124
--------- --------
Net cash used by operating activities 19,227 (15,099)
--------- --------
Cash flows from investing activities:
Purchase of property and equipment (23,178) (23,256)
--------- --------
Net cash used in investing activities (23,178) (23,256)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock (1,595) 421,950)
Principal payments on notes payable (250,000)
Proceeds from notes payable (1,887)
--------- --------
Net cash provided by financing activities (1,595) 170,063
--------- --------
Net decrease in cash and cash equivalents (5,546) 131,708
Cash and cash equivalents at beginning of period 522,354 562,012
--------- -------
Cash and cash equivalents at end of period $ 516,808 693,720
========= ========
Reconciliation of net income to net cash used by operating activities:
Net income $ 13,257 9,278
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 14,241 13,443
Allowance for doubtful accounts 0 (2,698)
Decrease (increase) in accounts receivable 7,695 (5,831)
Decrease in receivables from officers and employees 5,440 300
Increase in inventory (30,479) (20,887)
Decrease in accounts payable (8,596) (1,390)
Increase(decrease) in accrued expenses 12,085 (6,314)
(Increase)decrease in other assets (1,667) 777
Increase (decrease) in other liabilities 7,251 (1,777)
--------- --------
Total adjustments 5,970 (24,377)
--------- --------
Net cash used by operating activities $ 19,227 (15,099)
========= ========
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
PROTECH COMMUNICATIONS, INC.
Statement of Cash Flows For the 6 months ended
April 30, 1997 and April 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Cash received from sale of merchandise $ 441,060 391,313
Cash paid to vendors and employees (497,802) (437,544)
Interest paid -- (13,868)
Interest received 12,607 12,908
--------- --------
Net cash used by operating activities (44,135) (47,191)
--------- --------
Cash flows from investing activities:
Purchase of property and equipment (34,167) (37,084)
--------- --------
Net cash used in investing activities (34,167) (37,084)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock (1,595) 424,803
Principal payments on notes payable (250,226)
--------- --------
Net cash provided by financing activities (1,595) 206,725
--------- --------
Net (decrease)increase in cash and cash equivalents (79,897) 122,450
Cash and cash equivalents at beginning of period 596,705 571,270
--------- --------
Cash and cash equivalents at end of period $ 516,808 693,720
========= ========
Reconciliation of net income to net cash used by operating activities:
Net income $ (20,054) 36,998
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 14,686 13,443
Allowance for doubtful accounts 0 (2,698)
Decrease(increase) in accounts receivable 42,332 (6,314)
Decrease(increase) in receivables from officers and employees 4,427 (11,338)
Increase in inventory (45,841) (29,130)
Decrease in accounts payable (39,073) (21,872)
Decrease in accrued expenses (7,361) (28,823)
Increase in other assets 4,409 2,543
Increase in other liabilities 2,340
--------- --------
Total adjustments (24,081) (84,189)
--------- --------
Net cash used by operating activities $ (44,135) (47,191)
========= ========
</TABLE>
See accompanying notes to financial statements
7
<PAGE> 8
PROTECH COMMUNICATIONS, INC.
Statement of Stockholders' Equity
3 months ended April 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
----- ------- -------- -----
<S> <C> <C> <C> <C>
Balance, November 1, 1994 $ 2,000 119,485 -- 121,485
Issuance of 864,000 shares of 864 396,391 -- 397,255
common stock (note 5) (net costs
of $32,000 and subscribed stock for $2,000)
Net income -- -- 43,959 43,959
-------- ------- ------ ----------
Balance, October 31, 1995 2,864 515,876 43,959 562,699
Net profit, 3 month period
November 1, 1995 - April 30, 1996 36,998
Issuance of 1,100,000 shares of
common stock (note 6) (net of
issue costs of $98,824 and
subscribed stock for $2,000) 1,100 448,077 -- 449,177
Net loss -- -- (521) (521)
-------- ------- ------ ----------
Balance, October 31, 1996 3,964 963,953 43,438 1,011,355
-------- ------- ------ ----------
Registration of 2,240,00 shares of (46,645) (46,645)
common stock (note 6) (net of
issue costs of $46,645)
Purchase of authorized stock options 40 20,000 20,000
under the Registration of 2,240,000
shares made effective April 25, 1997
(note 6)
Purchase of authorized stock options 50 25,000 25,050
(note 7) under the Company's stock
option plan adopted April 15, 1996
Net (loss) for the 6 month period (20,054) (20,054)
October 31, 1996 to April 30, 1997 -------- ------- ------ ----------
Balance, April 30, 1997 $ 4,054 962,268 23,384 989,706
======== ======= ====== ==========
</TABLE>
See accompanying notes to financial statements
8
<PAGE> 9
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
April 30, 1997 and 1996
(1) Description of Business and Summary of Significant Accounting Policies
(A) Business
Pro Tech Communications, Inc. (the"Company") was organized and
incorporated under the laws of the State of Florida for the
purpose of designing, developing, producing and marketing
lightweight telephone headsets. The Company presently
manufactures and markets its first headset design primarily for
fast food companies and other large quantity users of headset
systems. The Company is in the process of completing the
development of a second design for the telephone user market,
which includes telephone operating companies, government agencies
and business offices. The Company's business strategy is to
offer lightweight headsets with design emphasis on performance and
durability at a cost below that of its competitors.
On November 1, 1994 all assets and liabilities of Pro Tech
Systems (a limited partnership) were transferred to Pro Tech
Communications, Inc. The former partners of Pro Tech Systems
received 2,000,000 shares of common stock in the Company in
exchange for their respective interests in the limited partnership.
Pro Tech Systems was formally dissolved as of December 13, 1994.
(B) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
(C) Inventory
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
9
<PAGE> 10
(D) Revenue and Cost Recognition
The Company recognizes revenues as products are shipped. New customers
are extended a 30-day trial period during which the product may be
returned. Additionally, each headset carries a two year warranty. The
Company provides, by a current charge to income, an amount it
estimates will be needed to cover future warranty obligations for
products sold during the year. The accrued liability for warranty
costs is included in accrued expenses in the balance sheet.
(E) Property and Equipment
Property and equipment is carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets which are generally 5-10 years. Repair and maintenance costs
are charged to expense when incurred.
(F) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets or liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
(G) Fair Value of Financial Instruments
The estimated fair values of the Company's cash and cash equivalents,
accounts receivable and current liabilities approximate the carrying
amount due to the short-term nature of such financial instruments.
(H) Reclassification
Certain amounts in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
10
<PAGE> 11
(I) Advertising
The costs of advertising, promotion and marketing programs are charged
to operations in the year incurred. Advertising costs approximated
$1,592 and $4,330 for the periods ended April 30, 1997 and 1996,
respectively, and were included in selling, general and administrative
expenses in the accompanying statement of operations.
(J) Research and Development
Research and development costs are expensed when incurred and are
included in selling, general and administrative expenses. The amount
charged to expense in the period ending April 30, 1997 and 1996 was
$11,320 and $3,940, respectively.
(K) Use of Estimates
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and contingent assets and
liabilities. Actual results could differ from those estimates.
11
<PAGE> 12
(L) Stock Option Plan
On October 23, 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation (Statement 123). This Statement applies to
all transactions in which an entity acquires goods or services by
issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price. The
Statement covers transactions with employees and non-employees and is
applicable to both public and nonpublic entities. Entities are allowed
(1) to continue to use the Accounting Principles Board Opinion No. 25
(APB 25) method, or (2) to adopt the Statement 123 fair value based
method. Once the method is adopted, an entity cannot change the method
and the method selected applies to all of an entity's compensation
plans and transactions. For entities not adopting the Statement 123
fair value based method, Statement 123 requires pro forma net income
and earnings per share information as if the fair value based method
had been adopted. For entities not adopting the fair value based
method, the disclosure requirements of Statement 123, including the
pro forma information, are effective for financial statements for
fiscal years beginning after December 15, 1995 (fiscal year ended
October 31, 1997 for the Company). The pro forma disclosures are to
include all awards granted in fiscal years that begin after December
15, 1994 (fiscal year ended October 31, 1996 for the Company).
However, the disclosures including the pro forma net income and
earnings per share disclosures, for the fiscal year beginning after
December 15, 1994 (fiscal year ended October 31, 1996 for the Company)
will not be included in that year's financial statements but will be
included in the following year end (fiscal year ended October 31, 1997
for the Company) financial statements if the first fiscal year is
presented for comparative purposes. Management has determined that the
Company will account for stock-based compensation under the APB 25
method and will disclose the pro forma impact of Statement 123 in
future years' financial statements.
12
<PAGE> 13
(M) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, on January 1, 1996. This Statement requires
that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicated that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not
have a material impact on the Company's financial position,
results of operations, or liquidity.
(N) Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
In June 1996, the Financial Accounting Standards Board issued
SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. SFAS No. 125 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996
and is to be applied prospectively. This Statement provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets
that are sales from transfers that are secured borrowings.
Management of the Company does not expect adoption of SFAS No. 125
will have a material impact on the Company's financial position,
results of operations, or liquidity.
(2) Inventory
Inventory at April 30, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials $ 77,968 60,694
Work in process 89,279 40,304
Finished goods 55,041 18,193
-------- --------
$222,288 $119,191
======== ========
</TABLE>
13
<PAGE> 14
(3) Net Property and Equipment
The following is a summary of property and equipment at April 33, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Production molds $112,723 80,474
Office equipment 54,342 41,204
Production equipment 20,691 8,217
Leasehold improvements 9,574 6,663
Vehicles 5,557 1,984
Marketing display 5,430 --
-------- -------
Total cost 208,317 138,542
Less: accumulated depreciation 59,956 24,735
-------- -------
Total $148,361 113,807
======== =======
</TABLE>
Total depreciation expense was $14,686 and $13,443 for the periods
ended April 30, 1997 and 1996, respectively.
(4) Notes Payable
The Company has $0 in notes payable as of April 30, 1997. Listed notes
payable below were paid in the comparative 1996 period.
<TABLE>
<CAPTION>
1997 1996
----- -------
<S> <C> <C>
Note payable to Euro Investment Corporation bearing
annual interest at 14.3%, payable on demand -- 250,000
Accrued interest on Euro Investment Corporation note -- 1,887
Total notes payable $ -- 251,887
====== =======
</TABLE>
14
<PAGE> 15
(5) Accrued Expenses
Accrued expense consisted of the following at
April 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
Accrued warranty expense $22,663 4,825
Accrued professional fees 6,700 --
Other accrued expenses 8,766 538
------- -----
$38,129 5,363
======= =====
</TABLE>
(6) Capital Stock
During fiscal year 1996, the Company underwent a stock offering under
Rule 504 of Regulation D promulgated under the Securities Act of 1933.
The offering sold 1,100,000 shares of common stock at $.50 per share,
yielding net cash proceeds of $451,177. During fiscal year 1995, the
Company underwent a stock offering under Rule 504 of Regulation D
promulgated under the Securities Act of 1933. The offering sold 864,000
shares of common stock at $.50 per share yielding net cash proceeds of
$399,255. During the current fiscal year, the Company has registered
2,240,000 shares of common stock for sale to the public pursuant to the
Securities Act of 1933. Of such shares, the Company intends to sell
1,000,000 shares and the balance of the shares are registered for sale
by certain selling stockholders. At April 30, 1997 $4,000 was held in
escrow for the benefit of the Company pending completion of the
subscription agreements by two investors for 4,000 shares each. These
receivables are netted against additional paid-in capital.
The Company, in conjunction with the stock offering of March 3, 1995,
issued warrants for 200,000 shares of common stock to the sales agent
responsible for sales outside the United States. As of April 30, 1997,
a summary of the warrants to purchase common stock, currently
exercisable, are as follows:
<TABLE>
<CAPTION>
Expiration Date Shares Exercise Price Per Warrant
-------------- ------ --------------------------
<S> <C> <C>
September 3, 1997 200,000 $ .60
September 26, 1998 600,000 $ 1.50
</TABLE>
15
<PAGE> 16
(7) Stock Option Plan
On April 15, 1996, the Board of Directors adopted The 1996 Stock
Option Plan (the Plan), for the benefit of directors, officers,
employees and consultants to the Company. The Plan authorizes the
issuance of up to 590,000 shares of common stock, all of which were
granted during fiscal year 1996.
On April 15, 1996, 540,000 and 50,000 shares were granted to the
Company's President and officers, respectively, at an option price of
$.50 per share. The stock option exercise price was the fair value at
the date of the grant, which was determined from the price paid per
share during the Company's stock offering carried out from April 8,
1996 to May 15, 1996, (note 5). The stock options are exercisable upon
the grant date, extending over a period of three years. On February 3,
1997, 50,000 shares were exercised with the Company by both officers.
As of April 30, 1997 the President has not exercised any options
granted to him by the Company.
(8) Operating Leases
The Company leases office and production facilities under operating
leases. Future minimum lease payments for such noncancelable leases as
of April 30, 1997 are as follows:
<TABLE>
<S> <C>
1997 8,690
1998 1,406
--------
Total $ 14,059
========
</TABLE>
Rent expense under lease agreements totaled $8,690 and $8,376 for the
period ending April 30, 1997 and 1996, respectively.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
RESULTS OF OPERATION
- --------------------
Three Months Ended April 30, 1997 Compared to Three Months Ended April 30, 1996
For the quarter ended April 30, 1997, the Company realized a net profit of
$13,257 compared to a net profit of $9,278 for the quarter ended April 30,
1996. This difference is attributed to the following changes. First, net sales
for the current period were nearly equal to last year, $205,987 in the current
period versus $204,625 in the comparable 1996 period. The current performance
represents an improvement of 2% in units shipped over the same comparable
period. All revenues for the period November 1, 1996 through April 30, 1997
period are the result of direct and distribution sales of the ProCom II
headset. Actual unit shipments have increased 4% in comparison to the same
quarter ended April 30, 1996. In addition, the Company's distribution net
revenues and unit volumes have increased 31% and 11% respectively over the
comparable period. This change is the result of the Company's efforts to move
all sales in the fast-food market to distributors in preparation to beginning
its market focus to other targeted markets. The Company believes, through its
own research, that the Company continues to retain a 37% share of the fast-food
market in units sold. The Company delayed the Conform market introduction to
the third quarter as a result of final production and engineering changes
completed April 30, 1997. Initial market testing shows a large potential for
this product's market niche. The remaining two headsets, the Trinity and the
NASA headset are scheduled for market introduction in the 4th quarter of fiscal
year 1997.
The Company improved its gross profit an additional 2%, 70% in the current
period versus 68% in the comparable 1996 period. This gain is the result of the
Company's commitment to keep production costs at a minimum. The Company reduced
its direct labor requirements and yet increased its production from further
improvements to the production process. Inventories increased to $222,218 versus
$119,191 in the comparable 1996 period in preparation for the shift of
production to the newer headsets planned for introduction in the 3rd and 4th
quarters. This increase allows for the Company to support the current and
planned demand for the ProCom II while not increasing short-term production
expenses. Investments in production equipment in the current period are expected
to further improve this production capacity along with showing improvements in
the quality of finished product. SG&A expenses for the current period were
$135,656 versus $119,308 in the comparable 1996 period. This difference is the
result of the Company's decision to offer medical insurance for all full-time
employees. All other expenses have been maintained at 1996 spending levels in
order to maximize profit margins. Investments in SG&A will be made as each new
product is introduced allowing for the maximization of profit margins. Finally,
additional investments of $11,320 were made in Research & Development in the
potential creation of the Company's first wireless product.
18
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
---------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's current ratio (current assets to current liabilities) was 17.00
to 1.00 at April 30, 1997 as compared to 79.10 to 1.00 at April 30, 1996. At
April 30, 1997, the Company's current assets exceeded its current liabilities by
approximately $843,685.
During the fiscal year ended October 31, 1995 and thereafter, the Company has
funded its working capital requirements with cash flow from operations and the
net proceeds of $846,432 from the private sale of 1,964,000 shares of common
stock. The Company intends to use the cash it generates from operations and the
net proceeds from the private sale of common stock to increase its share of the
fast-food headset market and to enter the telephone user market. Management
believes that the Company has sufficient funds to meet the Company's anticipated
working capital requirements for at least 12 months. However, in order for the
Company to maximize the potential of the telephone user market and to enable the
Company to maximize the potential of the telephone user market and to enable the
Company to expand into additional markets, including government agencies and
personal computers, the Company will require additional capital. The Company is
attempting to raise such additional financing through a self-underwritten public
offering of 1,000,000 shares of common stock and the receipt of $1,640,000 from
the exercise of 1,240,000 stock purchase warrants and options owned by six
persons, on whose behalf the Company has registered the shares of common stock
underlying such warrants and options with the Securities and Exchange
Commission. There can be no assurance that the warrants and options will be
exercised or that the Company will be successful in selling all or a portion of
its shares it has registered with the Securities and Exchange Commission. This
registration was declared effective by the Securities and Exchange Commission on
April 25, 1997.
Effective December 9, 1994, the Company entered into an amended and restated
employment agreement with Keith Larkin, the President, Chairman of the Board
and Treasurer of the Company. Under the agreement, Mr. Larkin will be entitled
to receive the annual salary of a maximum of $90,000 (as adjusted each year by
at least the percentage increase in the Consumer Price Index). The Company,
however, is only required to pay Mr. Larkin such a maximum annual salary if the
Company generates annual sales for a fiscal year of at least $2 million and has
pretax income equal to at least 20% of the Company's annual sales. In all other
cases, the board of directors sets Mr. Larkin's salary, taking into account the
Company's projected financial performance and cash required to satisfy the
Company's anticipated operating expenditures.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule (for SEC use only).
19
<PAGE> 19
(9) Related Party Transactions
During fiscal year 1996, the Company loaned $28,882 to its' President.
The loan bears interest at 15% per annum, with principal and interest
due August 2, 1997.
The Company has entered into an employment agreement with its'
President expiring December 9, 1999. The agreement provides for a
maximum annual salary of $90,000 with additional amounts added using
the consumer price index as a minimum. The President is eligible for
the maximum annual salary during a given year only if the Company
generates annual sales of at least $2,000,000 and pre-tax income equal
to at least 20% of the Company's annual sales. If at any time during
the Company's fiscal year the Board of Directors determines the
Company will not meet minimum requirements noted above, the Board
shall determine the President's compensation for that year, taking
into account the Company's projected financial performance and needs
for that year.
(10) Major Customers
For 1997 and 1996, approximately 30% and 60%, respectively, of all
sales were to McDonald's Restaurant franchises.
17
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROTECH COMMUNICATIONS, INC.
----------------------------
(REGISTRANT)
Date: June 13, 1997 By: /s/ Keith Larkin
---------------------------------
Keith Larkin
President and Chief Executive Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRO TECH COMMUNICATIONS, INC. FOR THE PERIOD ENDED APRIL
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<CASH> 516,808
<SECURITIES> 0
<RECEIVABLES> 143,357
<ALLOWANCES> 9,141
<INVENTORY> 222,288
<CURRENT-ASSETS> 896,404
<PP&E> 148,361
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,044,765
<CURRENT-LIABILITIES> 52,719
<BONDS> 0
0
0
<COMMON> 4,054
<OTHER-SE> 992,046
<TOTAL-LIABILITY-AND-EQUITY> 1,044,765
<SALES> 389,892
<TOTAL-REVENUES> 2,340
<CGS> 121,076
<TOTAL-COSTS> 299,137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (20,054)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (20,054)
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
