<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, 1998
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 14, 1998
Common stock, Par Value $.001 Per Share
4,254,000
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 2
PROTECH COMMUNICATIONS, INC.
Index
Page
Part I Financial Information
Item 1 Financial Statements
Balance Sheets at July 31, 1998
and 1997 (Unaudited) 3
Statements of Operations
for the Three months ended July 31,
1998 and 1997 (Unaudited) 4
Statements of Operations
for the Nine months ended July 31,
1998 and 1997 (Unaudited) 5
Statements of Cash Flows
for the Nine months ended July 31,
1998 and 1997 (Unaudited) 6
Notes to Financial Statements
(Unaudited) 7
Item 2 Management's Discussion and Analysis or
Plan of Operation 9
Part II OTHER INFORMATION
Exhibit 27 Financial Data Schedule
(for SEC use only)
SIGNATURES 12
<PAGE> 3
ProTech Communications, Inc.
Balance Sheets
July 31, 1998 and July 31, 1997
(unaudited)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
1998 1997
---------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 175,562 159,501
Short-term Investments 257,936 412,700
Accounts receivable less allowance for doubtful
accounts of $12,095 and $9,141 in 1998 and 1997,
respectively 306,196 202,115
Inventory (Note 2) 308,795 197,362
Deposits being held (Note 3) 0 50,000
Due from officers and employees 33,815 28,997
Other current assets 7,103 7,447
---------- ---------
Total current assets 1,089,407 1,058,122
Net property and equipment 189,952 149,206
---------- ---------
Total Assets $1,279,359 1,207,328
========== =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 30,177 12,432
Accrued expenses (Note 4) 112,120 42,703
---------- ---------
Total current liabilities 142,297 55,135
Stockholder's Equity:
Common Stock, $.001 par value, authorized 10,000,000
shares, issued and outstanding 4,254,000 4,254 4,254
Additional Paid in Capital 1,122,018 1,082,068
Retained Earnings 10,790 85,871
---------- ---------
Total Stockholders' Equity 1,137,062 1,152,193
---------- ---------
$1,279,359 1,207,328
========== =========
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
ProTech Communications, Inc.
Statements of Operations
Three months ended July 31, 1998 and July 31, 1997
(unaudited)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
1998 1997
---------- ---------
<S> <C> <C>
Net Sales $ 320,721 277,986
Cost of Goods Sold 112,891 87,891
---------- ---------
Gross Profit 207,830 190,095
Selling, general and administrative expenses 206,275 146,882
---------- ---------
Income from operations 1,555 43,213
Other income (expense):
Interest income 3,632 5,600
---------- ---------
Income before income taxes 5,187 48,813
Income taxes 0 6,327
---------- ---------
Net income $ 5,187 42,486
---------- ---------
Income per common share:
Basic $ 0.00 0.01
Diluted $ 0.00 0.01
Average common shares outstanding 4,254,000 4,058,444
========== =========
</TABLE>
4
<PAGE> 5
ProTech Communications, Inc.
Statements of Operations
Nine months ended July 31, 1998 and July 31, 1997
(unaudited)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
1998 1997
----------- ---------
<S> <C> <C>
Net Sales $ 812,680 661,513
Cost of Goods Sold 261,271 208,961
----------- ---------
Gross Profit 551,409 452,552
Selling, general and administrative expenses 586,327 442,000
----------- ---------
(Loss) income from operations (34,918) 10,552
Other income (expense):
Interest income 14,511 18,207
----------- ---------
(Loss) income before income taxes (20,407) 28,759
Income taxes 0 6,327
----------- ---------
Net (loss) income $ (20,407) 22,432
----------- ---------
Income per common share:
Basic $ 0.00 0.01
Diluted $ 0.00 0.01
Average common shares outstanding 4,254,000 4,058,444
=========== =========
</TABLE>
5
<PAGE> 6
Pro Tech Communications, Inc.
Statements of Cash Flows
For the Nine months ended July 31, 1998 and July 31, 1997
(unaudited)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
1998 1997
--------- --------
<S> <C> <C>
Cash Flows from operating activities:
Cash received from the sale of merchandise $ 556,870 626,474
Cash paid to vendors and employees (689,904) (746,800)
Interest received 14,510 18,207
--------- --------
Net cash used by operating activities (118,524) (102,119)
--------- --------
Cash flows from investing activities
Purchase of short-term investments -- (115,425)
Purchase of property and equipment (62,241) (40,790)
Net cash used in investing activities (62,241) (156,425)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 118,405
Net cash provided by financing activities 0 118,405
--------- --------
Net (decrease) in cash and cash equivalents (180,765) (139,929)
Cash and cash equivalents at the beginning of period 356,327 299,430
--------- --------
Cash and cash equivalents at the end of period 175,562 159,501
--------- --------
Reconciliation of net income (loss) to net cash used by operating activities:
Net income (loss) $ (20,407) 22,432
--------- --------
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Depreciation and amortization 27,689 20,464
Increase in accounts receivable (75,442) (46,655)
Decrease of employee accounts receivable 1,603 5,659
Increase in inventory (148,186) (20,326)
Increase (decrease) in accounts payable 7,438 (41,820)
Increase (decrease) in accrued expenses 53,185 (2,786)
Decrease (increase) in other assets 35,596 (39,087)
--------- --------
Total adjustments (98,117) (124,551)
--------- --------
Net cash used by operating activities $(118,524) (102,119)
========= ========
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
July 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 July 31, 1998 and
the results of operations and cash flows for the nine months ended July
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 nine months ended July 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 nine months ended July 31, 1998.
7
<PAGE> 8
(2) Inventory
Inventory at July 31, 1998 and 1997 consists of the following:
1998 1997
-------- --------
Raw materials $169,942 61,311
Work in process 68,006 63,163
Finished goods 70,847 72,888
-------- --------
$308,795 $197,362
======== ========
(3) Deposits Being Held
As of July 31, 1997 the Company was in preliminary stages of considering
the acquisition of a U.S. electronics manufacturer. In this regard, an
investment banking firm was retained to advise the Company in connection
with this acquisition. The Company paid the firm $50,000 for its services.
Subsequently, such negotiations were terminated.
(4) Accrued Expenses
Accrued expenses consisted of the following at July 31, 1998 and 1997:
1998 1997
-------- -------
Accrued warranty expense $ 55,000 22,663
Accrued executive compensation 22,500 --
Accrued professional fees 25,000 6,700
Other accrued expenses 9,620 13,340
-------- -------
$112,120 42,703
======== =======
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
================================================================================
RESULTS OF OPERATION
Three Months Ended July 31, 1998 Compared to Three Months Ended July 31, 1997
For the quarter ended July 31, 1998, the Company realized net income of $5,187
compared to a net income of $ 42,486 for the quarter ended July 31, 1997. This
difference is attributed to the fact that in the 1998 period, the Company has
increased its investment in engineering and related new hire production expenses
of $27,890 in preparation for several new product introductions planned in the
current fiscal year.
Net sales for the current fiscal year 1998 period were $42,735 or 15% higher
than last year's comparable period, $320,721 in the current period versus
$277,986 in the comparable 1997 period. This increase is the result of a
positive introduction of the Freedom headset to the fast-food market. In
addition, the current performance represents an improvement of 24% in total
units shipped over the same comparable period. All revenues for the period May
1, 1998 through July 31, 1998 period are the result of direct and distribution
sales of the ProCom IV, ConForm and Freedom headsets. In addition, the Company's
distribution net revenues and unit volumes continue to increase as a percentage
of total net sales from 14% for the quarter ended July 31, 1997 to 18% for the
quarter ended July 31, 1998. 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 on other targeted markets.
Gross profit decreased to approximately 65% in the current period versus 68% in
the comparable 1997 period. This reduction is the result of the Company's
preparation for new product introductions planned in the fourth quarter of
fiscal year 1998. Inventories have increased to $308,795 versus $197,362 in the
comparable 1997 period in preparation for the shift of production to the newer
headsets planned for introduction in the fourth quarter of fiscal year 1998 and
the second quarter of fiscal year 1999. This increase allows for the Company to
support the current and planned demand for the ProCom IV, Freedom and ConForm
headsets while not increasing short-term production expenses. SG&A expenses
increased 40% or $59,393 over the comparable period, $206,275 versus $146,882 in
the comparable 1997 period. The increase is primarily due to accrued
professional fees of $25,000 and related legal fees of $2,592 as a result of a
mediated settlement with the Company's previous public relations firm. The
remainder of the increase is from additional investments in research and
development in the potential creation of the Company's first wireless product
expected to be introduced to the market in the second quarter of the next fiscal
year. All other expenses have been maintained at the 1997 spending levels.
Investments in SG&A will be made as each new product is introduced.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
================================================================================
RESULTS OF OPERATION
Nine Months Ended July 31, 1998 Compared to Nine Months Ended July 31, 1997
For the nine months ended July 31, 1998, the Company realized a net loss of
$(20,407) compared to net income of $22,432 for the period ended July 31,
1997.
Net sales for the current fiscal period were $151,167 or 23% higher than last
year's comparable period, $812,680 in the current period versus $661,513 in the
comparable 1997 period. This increase is the result of a positive introduction
of the Freedom headset to the fast-food market. In addition, the current
performance represents an improvement of 25% in total units shipped over the
same comparable period. All revenues for the period November 1, 1997 through
July 31, 1998 period are the result of direct and distribution sales of the
ProCom IV, ConForm and Freedom headsets. In addition, the Company's distribution
net revenues and unit volumes continue to increase as a percent to total net
sales from 12% in the comparable prior nine month period to 18% for the nine
month period ended July 31, 1998. 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 on other targeted markets. The Company
will also introduce a new product to the telephone market called the APEX. It
will be formally introduced in the fourth fiscal quarter of 1998. Market tests
have proved to be exceptional in both concept and design. The Company will be
distributing this product worldwide beginning in the fourth quarter of the
current fiscal year. The Company has delayed market introduction for the Trinity
headset and amplifier which are scheduled for market introduction in the second
quarter of fiscal year 1999.
The Company maintained its gross profit of approximately 68% in the current
period with the comparable 1997 period. This achieved target is the result of
the Company's commitment to keep production costs at a minimum. In addition, the
Company has maintained its raw material expenses at 1997 spending levels from an
aggressive purchasing and cost control policy. The Company has also increased
its production capacity from further improvements to the production process.
Inventories have increased to $308,795 versus $197,362 in the comparable 1997
period in preparation for the shift of production to the newer headsets planned
for introduction in the 4th quarter of fiscal year 1998 and the second quarter
of fiscal year 1999. This increase allows for the Company to support the current
and planned demand for the ProCom IV, Freedom and ConForm headsets while not
increasing short-term production expenses. Further investments in new production
equipment last fiscal year are expected to improve this production capacity in
the current fiscal year along with showing improvements in the quality of
finished product. SG&A expenses increased 33% or $144,327 over the comparable
period, $586,327 versus $442,000 in the comparable 1997 period. The increase is
due primarily to additional investments in Research and Development, in the
potential creation of the Company's first wireless product expected to be
introduced to the market in the second quarter of fiscal year 1999 and an
increase in Sales and Marketing to support additional telemarketing and
promotional expenses related to the Freedom market introduction. All other
expenses have maintained at the 1997 spending levels. Investments in SG&A will
be made as each new product is introduced.
10
<PAGE> 11
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 7.66 to
1.00 at July 31, 1998 as compared to 19.19 to 1.00 at July 31, 1997. At July 31,
1998, the Company's current assets exceeded its current liabilities by
approximately $947,110.
The Company intends to use the cash it generates from operations and the net
proceeds from the prior private sales 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. 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 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
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
11
<PAGE> 12
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 September 14, 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 September 14, 1998
- ----------------------- and Chairman of the Board
Keith Larkin (Principal Executive, Financial
and Accounting Officer)
/s/ Richard Hennessey Director, Secretary September 14, 1998
- ----------------------- and Vice President of
Richard Hennessey Marketing
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRO TECH COMMUNICATIONS, INC. FOR THE NINE MONTHS ENDED
JULY 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> JUL-31-1998
<CASH> 175,562
<SECURITIES> 257,936
<RECEIVABLES> 340,011
<ALLOWANCES> 12,095
<INVENTORY> 308,795
<CURRENT-ASSETS> 1,089,407
<PP&E> 189,952
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,279,359
<CURRENT-LIABILITIES> 142,297
<BONDS> 0
0
0
<COMMON> 4,254
<OTHER-SE> 1,122,018
<TOTAL-LIABILITY-AND-EQUITY> 1,137,062
<SALES> 812,680
<TOTAL-REVENUES> 827,191
<CGS> 261,271
<TOTAL-COSTS> 586,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (20,407)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,407)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
