<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 January 31, 1998
[ ] 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:
NUMBER OF SHARES OUTSTANDING
CLASS ON MARCH 17, 1998
----- ----------------------------
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
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets at 3
January 31, 1998 and 1997
(Unaudited)
Statements of Operations 4
for the Three months ended
January 31, 1998 and 1997 (Unaudited)
Statements of Cash Flows 5
for the Three months ended
January 31, 1998 and 1997 (Unaudited)
Notes to Financial Statements 6
(Unaudited)
Item 2
Management's Discussion and Analysis or 8
Plan of Operation for the period
November 1, 1997 - January 31, 1998
PART II OTHER INFORMATION
Exhibit 27 Financial Data Schedule
(for SEC use only)
SIGNATURES 10
<PAGE> 3
PROTECH COMMUNICATIONS, INC.
Balance Sheets
January 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 237,311 $ 225,079
Short-term Investments 257,936 297,275
Accounts receivable less allowance for doubtful
accounts of $12,095 and $9,141 in 1998 and 1997,
respectively 266,169 122,055
Inventory (note 2) 266,577 191,809
Deposits being held 0 4,898
Due from officers and employees 35,418 34,437
Other current assets 7,104 17,509
----------- -----------
Total current assets 1,070,515 893,062
Net property and equipment 180,745 139,424
----------- -----------
Total Assets $ 1,251,260 $ 1,032,486
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 23,765 23,189
Accrued expenses (note 3) 79,303 26,044
----------- -----------
Total current liabilities 103,068 49,233
Stockholders' Equity:
Common Stock, $.001 par value, authorized 10,000,000
shares, issued and outstanding 4,254,000 and
3,964,000 shares in 1998 and 1997, respectively 4,254 3,964
Additional Paid in Capital 1,122,018 963,953
Retained Earnings 21,920 15,336
----------- -----------
Total Stockholders' Equity 1,148,192 983,253
----------- -----------
$ 1,251,260 $ 1,032,486
=========== ===========
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
PROTECH COMMUNICATIONS, INC.
Statements of Operations
Three months ended January 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1998 1997
---------- ----------
<S> <C> <C>
Net Sales $ 246,728 $ 183,514
Cost of Goods Sold 71,448 57,883
---------- ----------
Gross Profit 175,280 125,831
Selling, general and administrative expenses 192,526 159,662
---------- ----------
Loss from operations (17,546) (34,031)
Other income (expense):
Interest income 8,269 6,929
---------- ----------
Loss before income taxes (9,277) (28,102)
Income taxes 0 0
---------- ----------
Net loss $ (9,277) (28,102)
---------- ----------
Loss per common share:
Basic $ (0.00) $ (0.01)
Diluted $ (0.00) $ (0.01)
Average common shares outstanding 4,254,000 3,964,000
========== ==========
</TABLE>
4
<PAGE> 5
PROTECH COMMUNICATIONS, INC.
Statement of Cash Flows
Three months ended January 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from the sale of merchandise $ 247,755 $ 140,982
Cash paid to vendors and employees (340,735) (203,565)
Interest received 8,269 5,929
----------- -----------
Net cash used by operating activities $ (84,711) $ (56,554)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (34,305) (17,797)
Net cash used in investing activities (34,305) (17,797)
----------- -----------
Cash flows from financing activities: 0 0
Net cash provided by financing activities 0 0
Net (decrease) in cash and cash equivalents (119,016) (74,351)
Cash and cash equivalents at the beginning of period 356,327 299,430
----------- -----------
Cash and cash equivalents at the end of period 237,311 225,079
----------- -----------
Reconciliation of net income (loss) to net cash used by
operating activities:
Net income (loss) $ (9,277) (28,102)
----------- -----------
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 8,960 445
(Increase) decrease in accounts receivable (35,415) 33,405
Increase in inventory (105,968) (15,362)
Increase (decrease) in accounts payable 1,026 (23,116)
Increase (decrease) in accrued expenses 20,368 (19,416)
Decrease in other liabilities -- (4,408)
Decrease in other assets 35,595 0
----------- ----------
Total adjustments (75,434) (28,452)
----------- ----------
Net cash used by operating activities $ (84,711) (56,554)
----------- ----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
PRO TECH COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998 AND 1997
(UNAUDITED)
(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) ACCOUNTING POLICIES
In the opinion of management, the unaudited financial statements
contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's financial position as of
January 31, 1998 and the results of operations and cashflows for the
three months ended January 31, 1998. The accompanying interim
financial statements should be read in conjunction with the
Company's Form 10-KSB filing for the year ended October 31, 1997.
(C) INCOME (LOSS) PER SHARE
In February 1997, the FASB issued Statement No. 128, Earnings Per
Share (Statement 128), which establishes two 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 and, as prescribed by Statement 128, the Company
has reported income (loss) per share for the three months ended
January 31, 1998 and 1997 in accordance with this new statement.
The Company's stock options and stock purchase warrants outstanding
during 1998 and 1997 would be considered dilutive potential common
shares under Statement 128. However, such dilutive potential shares
have not been included in the computation of diluted income (loss) per
share since those shares are considered antidilutive as a result of
the Company's net loss for the three months ended January 31, 1998 and
1997.
6
<PAGE> 7
(2) INVENTORY
Inventory at January 31 ,1998 and 1997 consists of the following:
1998 1997
---- ----
Raw materials $110,490 129,438
Work in process 90,910 54,645
Finished goods 65,177 7,726
-------- --------
$266,577 $191,809
-------- --------
(4) ACCRUED EXPENSES
Accrued expenses consisted of the following at January 31, 1998 and 1997:
1998 1997
---- ----
Accrued warranty expense $55,000 22,663
Accrued executive compensation 11,250 --
Other accrued expenses 13,053 3,381
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$79,303 26,044
------- ------
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
=================================================================
RESULTS OF OPERATION
--------------------
Three months Ended January 31, 1998 Compared to three Months Ended
January 31, 1997
For the quarter ended January 31, 1998, the Company realized a net
loss of $(9,277) compared to a net loss of $(28,102) for the quarter
ended January 31, 1997. This difference is attributed to the fact that
in the 1998 period, the Company's net sales were more than its net
sales for the comparable prior period.
Net sales for the current fiscal year 1998 period were $63,214 or 34%
higher than last year's comparable period, $246,728 in the current
period versus $183,514 in the comparable 1997 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 35% in units shipped over the same comparable period.
All revenues for the period November 1, 1997 through January 31, 1998
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 31% and 10% 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 will also introduce a new product to the
fast-food market called the Freedom. It will be formally introduced
in the second fiscal quarter of 1998 and has preliminary product and
market test approval from the McDonald's Corporation. The Company will
be distributing this product worldwide beginning in the second quarter
of the current fiscal year. The Company has delayed market
introduction for the Trinity and the Astro headsets which are
scheduled for market introduction in the 2nd quarter of fiscal year
1998.
The Company improved its gross profit an additional 3%, 71% in the
current period versus 68% in the comparable 1997 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 have increased to $266,577 versus $191,809 in the
comparable 1997 period in preparation for the shift of production to
the newer headsets planned for introduction in the 2nd quarter of
fiscal year 1998. This increase allows for the Company to support the
current and planned demand for the ProCom II, Freedom and ConForm
headsets while not increasing short-term production expenses.
Investments in new production equipment last fiscal year are expected
to further improve this production capacity in the current fiscal year
along with showing improvements in the quality of finished products.
SG&A expenses increased 21% or $33,164 over the comparable period,
$192,826 versus $159,662 in the comparable 1997 period. This
difference is the result of several factors. First, the Company
incurred $7,927 in research and development expenses required in new
product designs along with an additional $16,451 in marketing and
advertising expenses in preparation for planned new product
introductions. In addition, the Company has made additional
investments of $5,000 in Research & Development in the potential
creation of the Company's first wireless product expected to be
introduced to the market in the fourth quarter of the current fiscal
year. All other expenses have been maintained at the 1997 spending
levels in order to maximize profits margins. Investments in SG&A will
be made as each new product is introduced allowing for the
maximization of profit margins.
8
<PAGE> 9
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 10.39 to 1.00 at January 31, 1998 as compared to 18.14 to 1.00 at
January 31, 1997. At January 31, 1998 the Company's current assets
exceeded its current liabilities by approximately $967,447.
The Company intends to use the cash it generates from operations and
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 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 will be entitled to receive a maximum annual
salary 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
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
9
<PAGE> 10
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 17, 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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ KEITH LARKIN PRESIDENT, TREASURER MARCH 17, 1998
- ---------------- AND CHAIRMAN OF THE BOARD
KEITH LARKIN (PRINCIPAL EXECUTIVE, FINANCIAL
AND ACCOUNTING OFFICER)
/s/ KENNETH CAMPBELL DIRECTOR, SECRETARY MARCH 17, 1998
- -------------------- AND VICE PRESIDENT OF
KENNETH CAMPBELL OPERATIONS
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRO TECH COMMUNICATIONS, INC. FOR THE THREE MONTHS ENDED
JANUARY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> $237,311
<SECURITIES> 257,936
<RECEIVABLES> 266,169
<ALLOWANCES> 12,095
<INVENTORY> 266,577
<CURRENT-ASSETS> 1,070,515
<PP&E> 180,745
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,251,260
<CURRENT-LIABILITIES> 103,068
<BONDS> 0
0
0
<COMMON> 4,254
<OTHER-SE> 1,122,018
<TOTAL-LIABILITY-AND-EQUITY> 1,148,192
<SALES> 246,728
<TOTAL-REVENUES> 254,997
<CGS> 71,448
<TOTAL-COSTS> 192,826
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,277)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,277)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,277)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
