<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
PRO TECH 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 No.)
3311 INDUSTRIAL 25TH STREET, FORT PIERCE, FLORIDA 34946
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(561)464-5100
- --------------------------------------------------------------------------------
(ISSUER'S TELEPHONE NUMBER)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.001 per share
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
--- ---
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The registrant's revenues for its most recent fiscal year: $996,993
As of January 26 , 1998, the aggregate market value of shares of the
registrant's voting stock (based upon the closing sale price of such stock as
reported by the OTC Bulletin Board of $4.25) held by non-affiliates of the
registrant was approximately $13,656,525. For the purposes of this computation,
all executive officers, directors and persons who beneficially own more than
five percent of the registrant's securities are deemed affiliates. Such
determination should not be an admission that such directors, officers or
beneficial owners are, in fact, affiliates of the registrant.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
YES NO NOT APPLICABLE X
--- --- ---
As of January 26, 1998, there were 4,254,000 shares of the registrant's common
stock outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
<PAGE> 2
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997 AS COMPARED TO THE YEAR ENDED OCTOBER 31, 1996.
For the year ended October 31, 1997, the Company realized a net loss of
$(12,241) compared to a net loss of $(521) for the year ended October 31, 1996.
This difference is attributed to additional profit margin of $20,274 gained
from the conform market introduction offset by an unplanned executive
compensation expense of $40,000 realized in the same period.
Net sales for the year ended October 31, 1997 totaled $996,993,
representing an increase of $144,215 in net sales for the comparable prior
twelve-month period. The Company continued the sale of its products through
distributors augmenting these sales with direct sales from the Company's own
outbound telemarketing operation. At the completion of fiscal year 1997, the
Company sold a total of 24,779 headsets, as compared to 20,810 headsets in the
previous fiscal year. The difference represents an increase in sales of 3,969
headsets or 19% more than the comparable twelve-month period. Net unit sales of
the ProCom headset increased 7% primarily from the expansion of sales into
international markets. Sales from the ConForm headset totalled 2,500 units
through October 31, 1997. The indirect distribution channel accounted for 63% of
the net revenues and 70% of unit volumes versus 62% of net revenues and 69% of
unit volumes in the comparable 1996 period. The Company, through its own
research, believes that the Company currently retains a 27% share of the
fast-food headset market in units. Although there can be no assurance, the
Company expects further expansion of the Company's market share in the fast food
headset market from the ConForm's market acceptance.
Gross margin percent remained constant over the previous comparable
year. Actual SG&A expenses increased $145,387 in relation to the 1996 comparable
year. This increase in expenses resulted from several factors. First, in fiscal
year 1997, an unaffiliated investment banking firm was retained in order to
proceed with the structuring of a potential purchase of another business.
However, the acquisition did not occur because the parties could not agree to
terms. Expenses incurred due to the completion of a fairness opinion relating to
the discontinued acquisition totalled $13,938. Second, expenses related to the
Company's stock promotion increased to $19,556 from $3,101 in the comparable
period. This increase of $16,455 was invested to improve the Company's
perception with the investment community. Marketing payroll increased $25,237
from $43,663 in fiscal year 1996 to $68,900 in the 1997 comparable period. This
increase was the result of the addition of one employee along with related
commissions for the Company's telemarketing operation. This addition was made to
support the new ConForm market introduction. In addition, advertising and other
related marketing expenses increased from $28,646 in fiscal year 1996 to $51,263
for the comparable 1997 period as a result of such new product introduction.
Research and development expenditures decreased by $23,200 as compared to fiscal
year 1996. The decrease was the result of a decision to delay investments until
fiscal year 1998, in order to maximize short-term profit margins. Additional
accrued warranty expenses increased to $55,000 to support normal repairs on over
70,000 headsets in use in the fast-food market. This increase was the result of
changes in the Company's warranty policies in support of its account base. This
represents an increase of $32,337 over the comparable 1996 period from $22,663
to $55,000 respectively. Additional expenses of $11,206 were incurred in the
current fiscal period as of the result of a decision to offer health insurance
to its full-time employees along with an increase in professional fees of
$35,555 in the current fiscal year from $25,000 due to the Company's reporting
obligations under the federal securities laws.
8
<PAGE> 3
The Company generated interest income of $28,688 for fiscal 1997 as
compared to interest income of $27,668 for the comparable prior 1996 year. The
interest income resulted from the Company's investment of the net proceeds from
the private placement of securities into short-term certificates of deposits.
LIQUIDITY AND CAPITAL RESOURCES
The current ratio (current assets to current liabilities) of the
Company was 13.20 to 1.00 at October 31, 1997 as compared to 9.86 to 1.00 at
October 31, 1996. At October 31, 1997, the Company's current assets exceeded its
current liabilities by approximately $988,973.
For the fiscal year ended October 31, 1997, the Company funded its
working capital requirements primarily with cash flow from operations and
proceeds of $165,000 from the exercise of outstanding stock options.
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 expand into additional markets,
including government agencies and personal computers, the Company will require
additional capital. It is anticipated that the Company will seek to raise such
additional financing through a private or public offering of equity, although
there are presently no agreements, understandings or arrangements with respect
to any additional financing and no assurances can be given that the Company will
be able to obtain such additional financing. The Company presently does not
intend to finance, to any significant extent, its growth through debt financing.
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 is entitled
to receive an annual salary of at least $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
pre-tax 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. During the year ended October 31,
1997, the Company's President was paid a salary in cash of $2,500. In addition
the Company recorded compensation expense of $40,000, with a corresponding
credit to additional paid-in capital, to reflect the estimated fair value of the
unpaid services provided by the President to the Company. During the year ended
October 31, 1996, the Company's President was paid a salary in cash of $42,500.
See "EXECUTIVE COMPENSATION--Employment Agreement."
ITEM 7. FINANCIAL STATEMENTS
The financial statements and notes thereto are included herein
beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not Applicable.
9
<PAGE> 4
Richard Hennessey joined the Company as Director of Marketing in August
1995 and was appointed Vice President - Marketing on June 10, 1996. From 1982
through 1984, Mr. Hennessey was a salesman with the computer sales division of
Lanier Business Products located in Boston, Massachusetts. From 1984 through
April 1994, Mr. Hennessey held various new venture sales and sales management
positions with Digital Equipment Corporation. From April 1994 until Mr.
Hennessey joined the Company, he was engaged in voluntary missionary work.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than 10% of a
registered class of the Company's equity securities to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership in the Common Stock. Executive officers, directors and
persons who own more than 10% of a registered class of the Company's equity
securities are required by SEC regulation to furnish the Company with copies of
all Section 16(a) forms they file with the SEC.
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and representations that no other reports
were required, during the fiscal year ended October 31, 1997, all of such
executive officers, directors and persons who own more than 10% of a registered
class of the Company's equity securities complied with all Section 16(a) filing
requirements, with the exception of Keith Larkin, who filed one Form 4 two
months late.
ITEM 10. EXECUTIVE COMPENSATION
Set forth below is certain information concerning the compensation paid
to the Company's chief executive officer for the fiscal years ended October 31,
1997, 1996 and 1995. No other executive officer of the Company received
compensation in excess of $100,000 for such fiscal years.
SUMMARY COMPENSATION TABLE
The following table provides the cash and other compensation paid or
accrued by the Company to its chief executive officer for the fiscal years ended
October 31, 1997, 1996 and 1995:
<TABLE>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME/POSITION YEAR SALARY BONUS STOCK OPTIONS COMPENSATION
- ------------- ---- ------ ----- ------------- ------------
<S> <C> <C> <C> <C> <C>
Keith Larkin 1997 $42,500 0 0 0
1996 $42,500 0 540,000* 0
1995 $22,500 0 0 0
</TABLE>
- ----------
* For a description of such stock options, see "EXECUTIVE COMPENSATION-Stock
Option Plan."
11
<PAGE> 5
EMPLOYMENT AGREEMENTS
Effective December 9, 1994, Keith Larkin entered into a five-year
amended and restated employment agreement with the Company, pursuant to which he
has the duties of President and Treasurer of the Company and has a right to
receive an annual salary of up to $90,000, which may increase each year by an
amount not less than the percentage increase in the United States Consumer Price
Index. Under the agreement, Mr. Larkin will only be entitled to receive an
annual salary of $90,000 if the Company generates annual sales for a fiscal year
of $2 million and has pre-tax income equal to at least 20% of the Company's
annual sales. In all 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. As part of
the consideration Mr. Larkin provided to the Company in exchange for the
Company's obligations under the employment agreement, Mr. Larkin assigned all of
his rights, title and interest in and to any and all inventions, discoveries,
developments, improvements, processes, trade secrets, trademark, copyright and
patent rights of which he conceived during the five years prior to the date of
the agreement. This provision covers the patent rights, if any, associated with
the ProCom, Trinity and Freedom lightweight telephone headsets. During the year
ended October 31, 1997, the Company's President was paid a salary in cash of
$2,500. In addition the Company recorded compensation expense of $40,000, with a
corresponding credit to additional paid-in capital, to reflect the estimated
fair value of the unpaid services provided by the President to the Company.
During the year ended October 31, 1996, the Company's President was paid a
salary in cash of $42,500.
The Company does not have written employment agreements with Kenneth
Campbell or Richard Hennessey. During each of the fiscal years ended October 31,
1997, 1996 and 1995, Mr. Campbell received a salary of $40,000 and Mr. Hennessey
received a salary of $40,000, $31,733 and $7,500, respectively.
STOCK OPTION PLAN
In April 1996, the Board of Directors of the Company adopted the
Company's 1996 Stock Option Plan (the 'Plan"). The Plan provides for the grant
by the Company of options to purchase up to an aggregate of 590,000 of the
Company's authorized but unissued shares of Common Stock (subject to adjustment
in certain cases including stock splits, recapitalizations and reorganizations)
to officers, directors, consultants, and other persons rendering services to the
Company.
The purposes of the Plan are to provide incentive to employees,
including officers, directors and consultants of the Company, to encourage such
persons to remain in the employ of the Company and to attract to the Company
persons of experience and ability. The Plan terminates on April 15, 2006.
Options granted under the Plan may be either incentive stock options
within the meaning of the Internal Revenue Code of 1986, as amended ("incentive
options"), or options that do not qualify as incentive options ("nonqualified
options"). The exercise price of incentive options must be at least equal to the
fair market value of the shares of Common Stock on the date of grant; provided,
however, that the exercise price of any incentive option granted to any person
who, at the time of the grant of the option, owns stock aggregating 10% or more
of the total combined voting power of the Company or any parent or subsidiary of
the Company ("Ten Percent Shareholder"), must not be less 110% of the fair
market value
12
<PAGE> 6
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The financial statements and notes thereto are included herein
beginning at page F-1.
<TABLE>
<CAPTION>
Page
<S> <C>
(a) 1. Index to Financial Statements
Report of Independent Certified Public Accountants F-1
Report of Independent Certified Public Accountants F-2
Balance Sheets for the years
ended October 31, 1997 and 1996 F-3
Statements of Operations for the years
ended October 31, 1997 and 1996 F-4
Statements of Stockholders' Equity for the years
ended October 31, 1997 and 1996 F-5
Statements of Cash Flows for the years
October 31, 1997 and 1996 F-6
Notes to Financial Statements F-7
(a) 2. Exhibits
3.1 Articles of Incorporation of the Company, dated October 5, 1994, and the
Amendments thereto, dated January 31, 1995.*
3.2 By-laws of the Company.*
10.1 Amended and Restated Employment Agreement, dated as of December 9, 1994,
between the Company and Keith Larkin.**(1)
10.2 The Company's 1996 Stock Option Plan.*(1)
10.3 Stock Option, dated April 15, 1996, issued by the Company to Keith
Larkin.*(1)
10.4 Lease, dated December 1, 1997, between the Company and Karen Development
Co.
10.5 Promissory Note, dated August 2, 1998, in favor of the Company.
27 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this Report.
</TABLE>
* Incorporated by reference to the initial filing with the SEC of the
Company's Form 10-SB on July 5, 1996.
** Incorporated by reference to Amendment No. 1 to the Company's Form 10-SB
which was filed with the Commission on October 4, 1996.
(1) Denotes a management contract or compensatory plan or arrangement.
15
<PAGE> 7
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Pro Tech Communications, Inc.:
We have audited the accompanying balance sheet of Pro Tech Communications, Inc.
as of October 31, 1997 and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The accompanying
financial statements of Pro Tech Communications, Inc. as of October 31, 1996,
were audited by other auditors whose report thereon dated December 12, 1996,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Pro Tech Communications,
Inc. as of October 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
December 16, 1997
Vero Beach, Florida
/s/ Morgan, Jacoby, Thurn & Associates, P.A.
F-1
<PAGE> 8
Independent Auditor's Report
----------------------------
The Board of Directors
Pro Tech Communication, Inc.:
We have audited the accompanying balance sheet of Pro tech Communications, Inc.
as of October 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pro Tech Communications, Inc.
as of October 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Maverick LLP
- ---------------------------
KPMG PEAT MAVERICK LLP
December 12, 1996
Tampa, Florida
F-2
<PAGE> 9
PRO TECH COMMUNICATIONS, INC.
Balance Sheets
October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 356,327 299,430
Short-term investments 257,936 297,275
Accounts receivable less allowance for doubtful accounts of $12,095
and $9,141 in 1997 and 1996, respectively 230,754 155,460
Inventory (note 2) 160,609 176,447
Due from officers and employees 35,418 34,656
Other current assets 37,088 13,994
---------- ----------
Total current assets 1,078,132 977,262
Net property and equipment (note 3) 155,400 128,880
Other assets 5,611 4,366
---------- ----------
$1,239,143 1,110,508
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 22,739 53,663
Accrued expenses (note 4) 58,935 45,490
---------- ----------
Total current liabilities 81,674 99,153
Stockholders' equity (note 5):
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 1,122,018 963,953
Retained earnings 31,197 43,438
---------- ----------
Total stockholders' equity 1,157,469 1,011,355
Commitments (note 7)
---------- ----------
$1,239,143 1,110,508
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 10
PRO TECH COMMUNICATIONS, INC.
Statements of Operations
Years ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 996,993 852,778
Cost of goods sold 333,755 281,682
----------- -----------
Gross profit 663,238 571,096
Selling, general and administrative expenses 698,785 513,398
Provision for doubtful accounts 3,924 (8,661)
----------- -----------
Income (loss) from operations (39,471) 66,359
Other income (expense):
Interest income 28,688 27,668
Interest expense -- (13,868)
Miscellaneous income 58 107
Loss on disposal of fixed assets (1,116) --
Form 10-SB filing costs (note 5) -- (79,072)
----------- -----------
Income (loss) before income taxes (11,841) 1,194
Income taxes (note 8) 400 1,715
----------- -----------
Net loss $ (12,241) (521)
=========== ===========
Income (loss) per common share - primary $ (0.00) (0.00)
=========== ===========
Average common shares outstanding 4,122,795 3,414,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 11
PRO TECH COMMUNICATIONS, INC.
Statements of Stockholders' Equity
Years ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, October 31, 1995 $ 2,864 515,876 43,959 562,699
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
Issuance of 290,000 shares of common stock
(notes 5 and 6) (net of issue costs
of $46,645) 290 118,065 -- 118,355
Executive Compensation Contributed by an
officer (note 5) -- 40,000 -- 40,000
Net loss -- -- (12.241) (12.241)
---------- ---------- ---------- ----------
Balance, October 31, 1997 $ 4,254 1,122,018 31,197 1,157,469
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 12
PRO TECH COMMUNICATIONS, INC.
Statements of Cash Flows
Years ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from sale of merchandise $ 907,839 885,952
Cash paid to employees and vendors (980,148) (1,008,028)
Interest paid -- (13,868)
Interest received 28,688 27,668
---------- ----------
Net cash used by operating activities (43,621) (108,276)
---------- ----------
Cash flows from investing activities:
Purchase of short-term investments (260,764) (502,181)
Proceeds on maturity of short-term investments 300,103 657,066
Purchase of property and equipment (57,176) (65,840)
Proceeds from sale of property and equipment -- 600
---------- ----------
Net cash provided (used) by investing activities (17,837) 89,645
---------- ----------
Cash flows from financing activities:
Principal payments on notes payable -- (250,226)
Proceeds from issuance of common stock 118,355 449,177
---------- ----------
Net cash provided by financing activities 118,355 198,951
---------- ----------
Net increase in cash and cash equivalents 56,897 180,320
Cash and cash equivalents at beginning of year 299,430 119,110
---------- ----------
Cash and cash equivalents at end of year $ 356,327 299,430
========== ==========
Reconciliation of net loss to net cash used by operating activities:
Net loss (12,241) (521)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 29,695 26,712
Allowance for doubtful accounts 2,954 (6,861)
Loss on disposal of fixed assets 1,116 470
Executive compensation contributed by an officer 40,000 --
Increase in accounts receivable (78,248) (29,188)
Decrease (increase) in inventory 15,838 (86,386)
Increase in receivables from officers and employees (762) (30,994)
Increase in other assets (24,494) (17,894)
(Decrease) increase in accounts payable (30,924) 25,082
Increase in accrued expenses 13,445 11,304
---------- ----------
Total adjustments (31,380) (107,755)
---------- ----------
Net cash used by operating activities $ (43,621) (108,276)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 13
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 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 headsets 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) SHORT-TERM INVESTMENTS
Short-term investments consist of certificates of deposits with
maturities in excess of three months. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, such
investments are classified as held-to-maturity and are recorded
at amortized cost, which approximates fair value. All
certificates of deposit mature during fiscal year 1998.
(d) INVENTORY
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(e) 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
one to 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.
(f) 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.
(Continued)
F-7
<PAGE> 14
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
(g) INCOME TAXES
Income taxes are accounted for under the asset and liability
method prescribed by SFAS No. 109. 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.
(h) ADVERTISING
The costs of advertising, promotion and marketing programs are
charged to operations in the year incurred. Advertising costs
approximated $20,817 and $14,200 for the years ended October 31,
1997 and 1996, respectively, and were included in selling,
general and administrative expenses in the accompanying
statement of operations.
(i) 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 during 1997 and 1996 was $21,400
and $44,600, respectively.
(j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's cash and cash
equivalents, short-term investments, accounts receivable and
current liabilities approximate the carrying amount due to the
short-term nature of such financial instruments.
(k) RECLASSIFICATION
Certain amounts in the 1996 financial statements have been
reclassified to conform with the 1997 presentation.
(l) 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.
(m) INCOME (LOSS) PER SHARE
Primary income (loss) per share is based on the weighted average
number of shares of common stock and common stock equivalents
(stock options and stock warrants) outstanding during the year.
Fully diluted income (loss) per share was antidilutive during
1997 and 1996 and is therefore not reported.
(Continued)
F-8
<PAGE> 15
(n) STOCK OPTIONS
On October 23, 1995, the Financial Accounting Standards Board
(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. Effective November 1, 1996, the Company adopted
Statement 123, which permits entities (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. 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.
(o) LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with
the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
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. There were no such impairments for the years ending
October 31, 1997 and 1996.
(p) NEW PRONOUNCEMENTS
In February 1997, the FASB issued Statement No. 128, EARNINGS
PER SHARE (Statement 128), which establishes two new methods for
computing earnings per share: basic and diluted. Basic and
diluted earnings per share replaces primary and fully-diluted
earnings per share prescribed by APB No. 15. Statement 128 is
effective for years ending after December 15, 1997 (fiscal year
1998 for the Company) and earlier application is not permitted.
In June 1997, the FASB issued Statement No. 130, REPORTING
COMPREHENSIVE INCOME (Statement 130), which establishes
standards for reporting and display of comprehensive income and
its components in a financial statement having the same
prominence as other financial statements. Statement 130 is
effective for years beginning after December 15, 1997 (fiscal
year 1999 for the Company).
F-9
<PAGE> 16
In June 1997, the FASB issued Statement No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(Statement 131), which establishes new standards for the way
enterprises disclose information about operating segments.
The Company does not expect these new pronouncements will have a
significant impact on the reporting of its financial results.
(2) INVENTORY
Inventory at October 31, 1997 and 1996 consists of the following:
1997 1996
-------- -------
Raw materials $ 63,802 84,751
Work in process 25,451 54,645
Finished goods 71,356 37,051
-------- -------
$160,609 176,447
======== =======
(3) NET PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at October 31, 1997
and 1996:
1997 1996
-------- -------
Production molds $121,845 98,124
Office equipment 56,158 50,156
Production equipment 29,611 8,217
Leasehold improvements 10,174 6,972
Vehicles 5,557 5,557
Marketing displays 5,430 5,430
-------- -------
Total cost 228,775 174,456
Less accumulated depreciation 73,375 45,576
-------- -------
Total $155,400 128,880
======== =======
Total depreciation expense was $29,540 and $26,056 for the years ended
October 31, 1997 and 1996, respectively.
(4) ACCRUED EXPENSES
Accrued expenses consisted of the following at October 31, 1997 and 1996:
1997 1996
-------- -------
Accrued warranty expense $ 55,000 22,663
Accrued professional fees - 11,155
Other accrued expenses 3,935 11,672
-------- -------
$ 58,935 45,490
======== =======
(Continued)
F-10
<PAGE> 17
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
(5) 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. At October 31, 1997 and 1996, $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.
Subsequent to the 1996 stock offering, the Company filed Form 10-SB,
(general form for registration of securities of small business issuers),
under Section 12(g) of the Securities Exchange Act of 1934. The Company
voluntarily registered its securities in hopes of demonstrating the
Company's integrity to potential investors. Due to the registration
taking place subsequent to the 1996 stock offering, registration costs of
$79,072 incurred by the Company were included in other expenses in the
accompanying statement of operations.
The Company, in conjunction with the 1995 stock offering, issued options
to purchase 200,000 shares of common stock at $0.60 per share to the
sales agent responsible for sales outside the United States. In June
1996, the Company issued warrants to purchase 200,000 shares of common
stock at $1.50 per share to each of three individuals, as consideration
for services to be rendered in marketing the Company's products
throughout the world. In December 1996, the Company issued warrants to
purchase 400,000 shares of common stock at $1.50 per share.
During fiscal year 1997, the Company filed Form SB-2 which allowed the
Company to sell an additional 1,000,000 shares of common stock at $5.25
per share. The filing also registered the common stock underlying the
1,000,000 outstanding warrants and 830,000 outstanding stock options
(note 6). As of October 31, 1997 no additional shares were sold as a
result of the offering. However, 200,000 options were exercised at a
price of $0.60 per share and 90,000 options were exercised at a price of
$0.50 per share. Total proceeds generated, net of related issue costs of
$46,645, were $118,355.
The following table summarizes warrants to purchase common stock:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C>
Warrants outstanding, beginning of
year 600,000 $ 1.50 -- $ --
Warrants granted 400,000 1.50 600,000 1.50
Warrants exercised -- -- -- --
--------- -------- --------- --------
Warrants outstanding and
exercisable, end of year 1,000,000 $ 1.50 600,000 $ 1.50
========= ======== ========= ========
</TABLE>
F-11
<PAGE> 18
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
Subsequent to October 31, 1997, and in accordance with the 1997
registration statement, all outstanding warrants were terminated.
During the year ended October 31, 1997, the Company's president was paid
a salary in cash of $2,500. In addition the Company recorded compensation
expense of $40,000, with a corresponding credit to additional paid-in
capital, to reflect the estimated fair value of the unpaid services
provided by the president to the Company. During the year ended October
31, 1996, the Company's president was paid a salary in cash of $42,500
(6) 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 authorized the issuance of up to
590,000 shares of common stock. 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.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
1997 1996
----------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
year 830,000 $ 0.52 240,000 $ 0.58
Options granted -- -- 590,000 0.50
Options exercised (290,000) (0.57) -- --
-------- -------- ------- --------
Options outstanding and
exercisable, end of year 540,000 $ 0.50 830,000 $ 0.52
======== ======== ======= ========
</TABLE>
During 1997, the Company received $25,000 upon issuance of 50,000 shares
of common stock upon the exercise of 50,000 options by the Company's
officers and $140,000 upon the issuance of 240,000 shares of common stock
to others. The remaining 540,000 stock options expire on April 15, 1999.
No compensation expense was recorded during 1996 for the options issued
to the Company's President and officers, in accordance with APB 25. Had
compensation expense been determined on the fair value at the date of
grant in accordance with the provisions of Statement 123, the Company's
net income (loss) and income (loss) per share would have been adjusted to
the pro forma amounts indicated below:
1997 1996
---- ----
Net income (loss):
As reported $(12,241) (521)
======== =======
Pro forma $(12,241) (74,083)
======== =======
Income (loss) per share:
As reported $ 0.00 (0.00)
======== ========
Pro forma $ 0.00 (0.02)
======== ========
(Continued)
F-12
<PAGE> 19
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996: dividend yield of
0%; expected volatility of 25%; risk-free interest rate of 6.00%; and,
expected lives of three years.
(7) OPERATING LEASES
The Company leases office and production facilities under operating
leases expiring November 30, 1997. On December 1, 1997, the Company
extended those leases to November 30, 1998. The Company also leases
office equipment under operating leases expiring at various dates. On
December 15, 1997, the Company extended one of these leases to July 15,
2001. Future minimum lease payments for such noncancelable leases,
considering the subsequent extensions of the lease terms, are as follows:
1998 $ 23,162
1999 6,307
2000 4,763
2001 2,656
--------
Total $ 36,888
========
Rent expense under lease agreements totaled $21,979 and $15,395 for
fiscal year 1997 and 1996 respectively.
(8) INCOME TAXES
Income tax expense (benefit) consist of:
CURRENT DEFERRED TOTAL
------- -------- -------
1997:
Federal $ 1,500 (1,000) 500
State 300 (400) (100)
------- ------- -------
$ 1,800 (1,400) 400
======= ======== =======
1996:
Federal 4,255 (2,800) 1,455
State 1,360 (1,100) 260
------- ------- -------
$ 5,615 (3,900) 1,715
======= ======= =======
(Continued)
F-13
<PAGE> 20
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
The actual expense differs from the "expected" amount computed by
applying the U.S. Federal corporate income tax rate of 34% to income
before income taxes as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computed "expected" tax expense (benefit) $ (4030) 406
Increase (reduction) in income taxes resulting from:
State income tax, net of federal tax benefits (70) 170
Effect of graduated tax rates (700) (5,400)
Nondeductible costs of potential acquisition 4,740 --
Nondeductible costs for SEC Form 10-SB filing -- 11,000
Other, net 460 (4,461)
-------- --------
$ 400 1,715
======== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accounts receivable principally due to allowance for
doubtful accounts $ 2,400 1,800
Accrued warranty expense 10,800 4,500
------- -------
Total deferred tax assets 13,200 6,300
Plant and equipment principally due to differences
in depreciation 7,900 2,400
------- -------
Total deferred tax liabilities 7,900 2,400
------- -------
Net deferred tax assets $ 5,300 3,900
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the period in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies
in making this assessment. Taxable income for the years ended October 31,
1997 and 1996 was $5,990 and $28,364, respectively. Based upon the level
of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits
of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are
reduced.
(Continued)
F-14
<PAGE> 21
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this amended report to be signed on its behalf by
the undersigned, thereunto duly authorized, on March 12, 1998.
PRO TECH COMMUNICATIONS, INC.
(Registrant)
By: /s/ Keith Larkin
--------------------------------
Keith Larkin, President
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Keith Larkin President, Treasurer and March 12, 1998
- ------------------------------ Chairman of the Board
Keith Larkin (Principal Executive, Financial
and Accounting Officer)
/s/ Kenneth Campbell Director, Secretary March 12, 1998
- ------------------------------ and Vice President of
Kenneth Campbell Operations
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRO TECH COMMUNICATIONS, INC. FOR THE YEAR ENDED OCTOBER
31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 356,327
<SECURITIES> 257,936
<RECEIVABLES> 266,172
<ALLOWANCES> 12,095
<INVENTORY> 160,609
<CURRENT-ASSETS> 1,078,132
<PP&E> 155,400
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,239,143
<CURRENT-LIABILITIES> 81,674
<BONDS> 0
0
0
<COMMON> 4,254
<OTHER-SE> 1,157,469
<TOTAL-LIABILITY-AND-EQUITY> 1,239,143
<SALES> 996,993
<TOTAL-REVENUES> 1,025,681
<CGS> 333,755
<TOTAL-COSTS> 698,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,924
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,841)
<INCOME-TAX> 400
<INCOME-CONTINUING> (12,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,241)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
