<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 July 31, 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 September 10, 1997
Common stock, Par Value $.001 Per Share 4,254,000
Transitional Small Business Disclosure Format: Yes No X
--- ---
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PROTECH COMMUNICATIONS, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Balance Sheets at July 31, 1997 and 3
1996 (UNAUDITED)
Statements of Operations 4
for the Three months ended July 31,
1997 and 1996 (UNAUDITED)
Statements of Operations 5
for the Nine months ended July 31,
1997 and 1996 (UNAUDITED)
Statements of Cash Flows 6
for the Nine months ended July 31,
1997 and 1996 (UNAUDITED)
Notes to Financial Statements 7
(UNAUDITED)
Item 2
Management's Discussion and Analysis 16
or Plan of Operation for the period
November 1, 1996 - July 31, 1997
Management's Discussion and Analysis 17
or Plan of Operation for the period
April 30, 1997 - July 31, 1997
PART II OTHER INFORMATION
Item 6 Exhibits and Reports and Form 8-K
Exhibit 27 Financial Data Schedule
(for SEC use only)
Reports on Form 8-K 18
SIGNATURES 19
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ProTech Communications, Inc.
Balance Sheets
July 31, 1997 and July 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 572,201 $ 636,166
Accounts receivable less allowance for doubtful
accounts of $9,141 and $19,382 in 1997 and 1996,
respectively 202,115 132,300
Inventory (note 2) 197,362 151,346
Deposits being held (note 12) 50,000 500
Due from officers and employees (note 10) 28,997 15,000
Other current assets 7,447 777
----------- -----------
Total current assets $ 1,058,122 $ 936,089
Net property and equipment (note 3) 149,206 151,560
----------- -----------
Total Assets $ 1,207,328 $ 1,087,649
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities: (note 4)
Accounts payable 12,432 29,233
Accrued expenses 42,703 3,380
----------- -----------
Total current liabilities 55,135 32,613
Stockholder's Equity: (note 6)
Common Stock, $.001 par value, authorized 10,000,000
shares, issued and outstanding 4,254,000 and
3,964,000 shares in 1997 and 1996, respectively 4,254 3,964
Additional Paid in Capital 1,082,068 972,727
Retained Earnings 65,871 78,342
----------- -----------
Total Stockholders' Equity 1,152,193 1,055,033
Commitments (note 8) ----------- -----------
$ 1,207,328 $ 1,087,646
=========== ===========
</TABLE>
See accompanying notes to financial statements
3
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ProTech Communications, Inc.
Statements of Operations
Three Months Ended July 31, 1997
1997 1996
--------- ---------
Net Sales (note 11) $277,986 222,687
Cost of Goods Sold 87,891 88,774
--------- ---------
Gross Profit 190,095 133,913
Selling, general administrative expenses 146,882 82,627
--------- ---------
Income from operations 43,213 51,286
Other income (expense):
Interest income 5,600 7,075
SEC Registration Expense (Note 13) -- (49,591)
--------- ---------
Income before income taxes 48,813 8,770
Income taxes 6,327 3,045
--------- ---------
Net Income $ 42,486 5,725
========= =========
Income per common share $ 0.01 0.01
========= =========
Average common shares outstanding 4,058,444 3,964,000
========= =========
See accompanying notes to financial statements.
4
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ProTech Communications, Inc.
Statements of Operations
Nine months ended July 31, 1997 and 1996
(UNAUDITED)
1997 1996
--------- ---------
Net Sales (note 11) $ 661,513 626,492
Cost of Goods Sold 208,961 251,681
--------- ---------
Gross Profit 452,552 374,811
Selling, general and administrative expenses 442,000 335,575
Provision for doubtful accounts 0 (2,698)
--------- ---------
Income from operations 10,552 41,934
Other income (expense):
Interest income 18,207 19,983
Interest expense 0 (13,868)
--------- ---------
Income before income taxes 28,759 48,049
Income taxes 6,327 10,427
--------- ---------
Net Income $ 22,432 37,622
========= =========
Income per common share $ 0.01 0.01
========= =========
Average common shares outstanding 4,058,444 3,964,000
========= =========
See accompanying notes to financial statements.
5
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PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
For the Nine months ended July 31,1997 and July 31, 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from sale of merchandise $ 626,474 584,007
Cash paid to vendors and employees (746,800) (665,866)
Interest paid -0- (13,868)
Interest received 18,207 19,983
--------- -------
Net cash used by operating activities (102,119) (75,744)
--------- -------
Cash flows from investing activities:
Purchase of property and equipment (40,790) (67,085)
Proceeds from the sale of property and equipment -0- -0-
--------- -------
Net cash used in investing activities (40,790) (67,085)
--------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 118,405 457,851
Principal payments on notes payable -0- (250,226)
--------- -------
Net cash provided by financing activities 118,405 207,725
--------- -------
Net (decrease)increase in cash and cash equivalents (24,504) 64,896
Cash and cash equivalents at beginning of period 596,705 571,270
--------- -------
Cash and cash equivalents at end of period $ 572,201 636,166
========= =======
Reconciliation of net income to net cash used by operating activities:
Net income $ 22,432 37,622
--------- -------
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation and amortization 20,464 -0-
Increase in accounts receivable (46,655) (12,791)
Decrease(increase) in receivables from officers and employees 5,659 (11,338)
Increase in inventory (20,326) (59,332)
Decrease in accounts payable (41,231) (1,054)
Decrease in accrued expenses (2,786) (30,806)
(Increase)decrease in other liabilities (589) 1,955
Increase in other assets (39,087) -0-
--------- -------
Total adjustments (124,551) (113,366)
Net cash used by operating activities $(102,119) (75,744)
========= =======
</TABLE>
See accompanying notes to financial statements
6
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PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
July 31, 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.
(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.
7
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(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.
8
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(i) ADVERTISING
The costs of advertising, promotion and marketing programs are charged
to operations in the year incurred. Advertising costs approximated
$2,959 and $901 for the 3 month periods ended July 31, 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 3 month periods ending July 31, 1997 and 1996
was $4,057 and $2,710, 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.
9
<PAGE> 10
(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.
10
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(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 July 31, 1997 and 1996 consists of the following:
1997 1996
---- ----
Raw materials $ 61,311 119,313
Work in process 63,163 1,000
Finished goods 72,888 31,033
-------- --------
$197,362 $151,346
-------- --------
11
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(3) NET PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at July 31, 1997
and 1996:
1997 1996
---- ----
Production molds $112,723 84,385
Office equipment 54,342 47,612
Production equipment 27,020 22,835
Leasehold improvements 10,174 6,972
Vehicles 5,557 18,730
Marketing display 5,429 --
-------- -------
Total cost 215,245 180,534
Less: accumulated depreciation 66,039 28,974
-------- -------
TOTAL $149,206 151,560
-------- -------
Total depreciation expense was $22,333 and $0 for the 9 month periods
ended July 31, 1997 and 1996, respectively.
(4) NOTES PAYABLE
The Company has $0 in notes payable as of July 31, 1997 and 1996.
Listed notes payable below were paid in the comparative 1996 period.
12
<PAGE> 13
(5) ACCRUED EXPENSES
Accrued expense consisted of the following at July 31, 1997 and 1996:
1997 1996
------- -----
Accrued warranty expense $22,663 2,842
Other accrued expenses 20,040 538
------- -----
$42,703 3,380
------- -----
(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.
Pursuant to the offering the Company sold 1,100,000 shares of common
stock at $.50 per share, yielding net cash proceeds of $451,177. 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 with certain selling
stockholders. The registration statement presently does not contain
current information and will need to be updated before the shares
covered thereby can be sold.
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. These warrants to
purchase shares at $0.60 were exercised on May 2, 1997. As of July 31,
1997, a summary of the warrants to purchase common stock, currently
exercisable, are as follows:
EXPIRATION DATE SHARES EXERCISE PRICE PER WARRANT
--------------- ------ --------------------------
SEPTEMBER 26, 1998 600,000 $ 1.50
13
<PAGE> 14
(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 the officers.
As of July 31, 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 July 31, 1997 are as follows:
1997 4,218
1998 1,406
------
Total $5,624
------
Rent expense under lease agreements totaled $13,004 and $11,178 for the
9 month period ending July 31, 1997 and 1996, respectively.
14
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(10) RELATED PARTY TRANSACTIONS
During fiscal year 1996, the Company loaned $28,882 to its' President.
The loan bearing interest at 15% per annum, with principal and interest
was required 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.
(11) MAJOR CUSTOMERS
For the nine-month periods ended July 31, 1997 and 1996, approximately
30% and 60%, respectively, of all sales were to McDonald's Restaurant
franchises.
(12) DEPOSITS BEING HELD
The Company is in the preliminary stages of considering the acquisition
of a U.S. electronics manufacturer with fiscal 1996 revenues of over $3
million. In this regard, an investment banking firm has been retained
to advise the Company in connection with the acquisition. The Company
has paid such firm $50,000 for its services. Because the Company is
still in the process of negotiating with the acquisition candidate,
there can be no assurance that the transaction will occur.
(13) SEC REGISTRATION EXPENSE
To improve the Company's position with the investment community the
Company completed its registration on Form 10-SB with the Securities
and Exchange Commission. The total expenses incurred by the
registration during the period May 1, 1996 and July 31, 1996.
- Legal Expense $17,091
- Public Relations $32,500
-------
Total $49,591
15
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
================================================================================
RESULTS OF OPERATION
- --------------------
Nine months Ended July 31, 1997 Compared to nine Months Ended July 31, 1996
For the 9 month period ended July 31, 1997, the Company realized a net profit of
$22,432 compared to a net profit of $37,622 for the 9 month period ended July
31, 1996. This difference is attributed to an increase in investments in public
relations and the internet of $20,209. Management believes that this investment
will further attract future investment in the Company.
Net sales for the current period were $35,021 or 6% higher than last year's
comparable period, $661,513 in the current period versus $626,492 in the
comparable 1996 period. This increase is the result of a positive introduction
of the ConForm headset to the fast-food market. In addition, the current
performance represents an improvement of 10% in units shipped over the same
comparable period. All revenues for the period November 1, 1996 through July 31,
1997 period are the result of direct and distribution sales of the ProCom II and
ConForm headset. In addition, the Company's distribution net revenues and unit
volumes have increased 25% and 9% respectively, over the comparable period. This
change is the result of the Company's continued 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 27% share of the fast-food market in units sold.
The Company delayed market introduction for the remaining two headsets, the
Trinity and the Astro headsets, which are scheduled for market introduction in
the 1st quarter of fiscal year 1998.
The Company improved its gross profit an additional 8%, 68% in the current
period versus 60% 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 decreased from the previous
1997 quarter from $222,288 to $197,362 as a result of increased sales volume for
the current 3rd quarter. However inventories have increased to $197,362 versus
$151,346 in the comparable 1996 period in preparation for the shift of
production to the newer headsets planned for introduction in the 1st quarter of
fiscal year 1998. This increase allows for the Company to support the current
and planned demand for the ProCom II and ConForm headsets 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 were
$442,000 for the nine month period ending July 31, 1997 versus $335,575 for the
1996 comparable period. This represents an increase of $106,425 or 32% more than
the comparable 1996 period. This increase is the result of several factors.
First, a portion of the increase, $24,914, resulted from marketing and
advertising start-up expenses associated with the new product introduction. The
majority of the increase, $75,950, resulted from additional expenditures in
support of product warranties, $22,630, along with an increase in year-end
auditing expenses, $19,580, from the result of the Company's new reporting
position with the Securities and Exchange Commission. An increase of general
expenses of $13,772, is the result of the Company's decision to offer medical
insurance for all full-time employees. In addition, the Company has made
additional investments of $8,725 in Research & Development in the potential
creation of the Company's first wireless product. Finally, to further improve
and expand its market position, the Company has begun preliminary negotiations
to acquire another company. An investment banking firm has been retained to
assist in this potential acquisition and will begin work in the 4th quarter of
this fiscal year.
16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
===============================================================================
RESULTS OF OPERATION
- --------------------
Three months Ended July 31, 1997 Compared to three Months Ended July 31, 1996
For the quarter ended July 31, 1997, the Company realized a net profit of
$42,486 compared to a net profit of $5,725 for the quarter ended July 31, 1996.
This difference is attributed to the following factor. In the 1996 period, the
Company completed its registration on Form 10-SB with the Securities and
Exchange Commission. Total expenses of $49,591 were incurred in this 1996 period
versus $0 in the comparable 1997 period.
Net sales for the current period were $55,299 or 25% higher than last year's
comparable period, $277,986 in the current period versus $222,687 in the
comparable 1996 period. This increase is the result of a positive introduction
of the ConForm headset to the fast-food market. In addition, the current
performance represents an improvement of 20% in units shipped over the same
comparable period. All revenues for the period November 1, 1996 through July 31,
1997 period are the result of direct and distribution sales of the ProCom II and
ConForm headset. In addition, the Company's distribution net revenues and unit
volumes have increased 25% and 9%, 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 27% share of the fast-food market in units sold.
The Company delayed market introduction for the remaining two headsets, the
Trinity and the Astro headsets which are scheduled for market introduction in
the 1st quarter of fiscal year 1998.
The Company improved its gross profit an additional 8%, 68% in the current
period versus 60% 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 decreased from the previous
1997 quarter from $222,288 to $197,362 as a result of increased sales volume
for the current 3rd quarter. However inventories have increased $197,362
versus $151,346 in the comparable 1996 period in preparation for the shift
production to the newer headsets planned for introduction in the 1st quarter of
fiscal year 1998. This increase allows for the Company to support the current
and planned demand for the ProCom II and ConForm headsets 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
were nearly equal to the comparable period, $146,882 versus $132,218 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
maintained at the 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. In addition, the Company has made additional
investments of $4,057 in Research & Development in the potential creation of
the Company's first wireless product. Finally, to further improve and expand
the its' market position, the Company has begun preliminary negotiations to
acquire another company. An investment banking firm has been retained to assist
in this potential acquisition and will begin work in the 4th quarter.
17
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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 19.19
to 1.00 at July 31, 1997 as compared to 28.70 to 1.00 at July 31, 1996. At July
31, 1997, the Company's current assets exceeded its current liabilities by
approximately $1,002,987.
The Company intends to use the cash it generates from operations and the
net proceeds from the private sale of common stock to increase it 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 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 of 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 portion of
its shares it intends to register with the Securities and Exchange Commission.
This registration has been declared effective by the Securities and Exchange
Commission on April 25, 1997. As of July 31, 1997, 200,000 options on shares
were purchased under this registration raising $120,000 in additional working
capital for the Company.
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. Larking 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)
(b) A Form 8-K was filed by the Company with the Securities Exchange
Commission on July 1, 1997 reporting information pursuant to
Item 4 of the form.
18
<PAGE> 19
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: September 15, 1997 By: /s/ Keith Larkin
-------------------------------------
Keith Larkin
President and Chief Executive Officer
19
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 572,201
<SECURITIES> 0
<RECEIVABLES> 231,112
<ALLOWANCES> 9,141
<INVENTORY> 197,362
<CURRENT-ASSETS> 1,058,122
<PP&E> 149,206
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,207,328
<CURRENT-LIABILITIES> 55,135
<BONDS> 0
0
0
<COMMON> 4,254
<OTHER-SE> 1,147,939
<TOTAL-LIABILITY-AND-EQUITY> 1,152,193
<SALES> 661,513
<TOTAL-REVENUES> 0
<CGS> 208,961
<TOTAL-COSTS> 442,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,207
<INCOME-PRETAX> 28,759
<INCOME-TAX> 6,327
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,432
<EPS-PRIMARY> .01
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