<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period April 30, 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:
Number of Shares Outstanding
Class on June 12, 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
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Balance Sheets at April 30, 1998 3
and 1997
(UNAUDITED)
Statements of Operations 4
for the Three months ended April 30,
1998 and 1997 (UNAUDITED)
Statements of Operations 5
for the Six months ended April 30,
1998 and 1997 (UNAUDITED)
Statements of Cash Flows 6
for the Six months ended April 30,
1998 and 1997 (UNAUDITED)
Notes to Financial Statements 7
(UNAUDITED)
Item 2
Management's Discussion and Analysis or 9
Plan of Operation
PART II OTHER INFORMATION
Exhibit 27 Financial Data Schedule
(for SEC use only)
SIGNATURES 12
<PAGE> 3
ProTech Communications, Inc.
Balance Sheets
April 30, 1998 and April 30, 1997
(unaudited)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
1998 1997
----------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 145,847 219,533
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 286,415 114,360
Inventory (Note 2) 308,284 222,288
Due from officers and employees 41,500 28,997
Other current assets 7,103 11,611
----------- ---------
Total current assets 1,047,085 894,064
Net property and equipment 189,122 148,361
----------- ---------
Total Assets $ 1,236,207 1,042,425
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 15,469 14,590
Accrued expenses (Note 3) 88,863 38,129
----------- ---------
Total current liabilities 104,332 52,719
Stockholder's Equity: (Note 4)
Common Stock, $.001 par value, authorized 10,000,000
shares, issued and outstanding 4,254,000 and
4,054,000 shares in 1998 and 1997, respectively 4,254 4,054
Additional Paid in Capital 1,122,018 962,268
Retained Earnings 5,603 23,384
----------- ---------
Total Stockholders' Equity 1,131,875 989,706
----------- ---------
$ 1,236,207 1,042,425
=========== =========
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
ProTech Communications, Inc.
Statements of Operations
Three months ended April 30, 1998 and April 30, 1997
(unaudited)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
1998 1997
----------- -----------
<S> <C> <C>
Net Sales $ 246,367 205,987
Cost of Goods Sold 76,933 61,412
----------- -----------
Gross Profit 169,434 144,575
Selling, general and administrative expenses 188,361 135,656
----------- -----------
(Loss) income from operations (18,927) 8,919
Other income (expense):
Interest income 2,610 6,674
----------- -----------
(Loss) income before income taxes (16,317) 15,595
Income taxes 0 2,340
----------- -----------
Net (loss) income $ (16,317) 13,255
=========== ===========
Loss per common share:
Basic $ (0.00) (0.00)
Diluted $ (0.00) (0.00)
Average common shares outstanding 4,254,000 4,054,000
=========== ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
ProTech Communications, Inc.
Statements of Operations
Six months ended April 30, 1998 and April 30, 1997
(unaudited)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
1998 1997
----------- -----------
<S> <C> <C>
Net Sales $ 491,959 389,892
Cost of Goods Sold 148,380 121,076
----------- -----------
Gross Profit 343,579 268,816
Selling, general and administrative expenses 380,052 299,137
----------- -----------
Loss from operations (36,473) (30,321)
Other income (expense):
Interest income 10,879 12,607
----------- -----------
Loss before income taxes (25,594) (17,714)
Income taxes 0 2,340
----------- -----------
Net loss $ (25,594) (20,054)
=========== ===========
Loss per common share:
Basic $ (0.00) (0.00)
Diluted $ (0.00) (0.00)
Average common shares outstanding 4,254,000 4,054,000
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
Pro Tech Communications, Inc.
Statements of Cash Flows
For the Six months ended April 30, 1998 and April 30, 1997
(unaudited)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from operating activities:
Cash received from the sale of merchandise $ 424,211 441,060
Cash paid to vendors and employees (593,578) (497,802)
Interest received 10,879 12,607
--------- ---------
Net cash used by operating activities (158,488) (44,135)
--------- ---------
Cash flows from investing activities
Purchase of property and equipment (51,992) (34,167)
Net cash used in investing activities (51,992) (34,167)
--------- ---------
Cash flows from financing activities: 0 (1,595)
Net cash provided by financing activities 0 (1,595)
--------- ---------
Net (decrease) in cash and cash equivalents (210,480) (79,897)
Cash and cash equivalents at the beginning of period 356,327 299,420
--------- ---------
Cash and cash equivalents at the end of period 145,847 219,533
========= =========
Reconciliation of net income(loss) to net cash used by operating activities:
Net income(loss) $ (25,594) (20,054)
--------- ---------
Adjustments to reconcile net income(loss) to net cash used by operating
activities:
Depreciation and amortization 18,270 14,686
(Increase)decrease in accounts receivable (61,743) 42,332
(Increase)decrease of employee accounts receivable (7,535) 4,427
Increase in inventory (147,675) (45,841)
Increase(decrease) in accounts payable 1,530 (39,073)
Increase(decrease) in accrued expenses 29,929 (7,361)
Increase in other liabilities -- 4,409
Decrease in other assets 34,330 0
--------- ---------
Total adjustments (132,894) (24,081)
--------- ---------
Net cash used by operating activities $(158,488) (44,135)
========= =========
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
April 30, 1998 and 19997
(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
April 30, 1998 and the results of operations and cash flows for the
six months ended April 30, 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
Shares (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 six months
ended April 30, 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 six months ended April 30, 1998
and 1997.
7
<PAGE> 8
(2) INVENTORY
Inventory at April 30, 1998 and 1997 consists of the following:
1998 1997
-------- --------
Raw materials $122,440 77,968
Work in process 128,972 89,279
Finished goods 56,872 55,041
-------- --------
$308,284 $222,288
-------- --------
(3) ACCRUED EXPENSES
Accrued expenses consisted of the following at April 30, 1998 and
1997:
1998 1997
-------- --------
Accrued warranty expense $ 55,000 22,663
Accrued executive compensation 22,500 --
Accrued professional fees -- 6,700
Other accrued expenses 11,363 8,766
-------- --------
$ 88,863 $ 38,129
-------- --------
(4) STOCK OPTION PLAN
On March 5, 1998, the Board of Directors adopted the 1998 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 500,000 shares of common stock.
On March 5, 1998, 100,000 and 25,000 shares were granted to the
Company's Vice Presidents at an option price of $2.6875. The stock
option exercise price was the fair value at the date of the grant,
which was determined from the closing paid price of the Company's
stock on the NASD Bulletin Board on March 5, 1998. The stock options
are exercisable upon the date of grant, extending over the period
of three years. The options have not been exercised through the
current period.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
================================================================================
RESULTS OF OPERATION
- --------------------
Three months Ended April 30, 1998 Compared to three Months Ended April 30, 1997
For the quarter ended April 30, 1998, the Company realized a net loss of
$(16,317) compared to a net income of $ 13,255 for the quarter ended April 30,
1997. This difference is attributed to the fact that in the 1998 period, the
Company has increased its investment in engineering and related New Product
Sales and Marketing expenses of $30,205 in preparation for several new product
introductions planned in the current fiscal year.
Net sales for the current fiscal year 1998 period were $40,380 or 20% higher
than last year's comparable period, $246,367 in the current period versus
$205,987 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 33% in total
units shipped over the same comparable period. All revenues for the period
February 1, 1998 through April 30, 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 17% to 20% 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 focusing on other targeted markets.
The Company maintained its gross profit of approximately 68.7% in the current
period. This achieved target is the result of the Company's commitment to keep
production costs at a minimum. In addition, the Company reduced its direct labor
requirements and yet increased its production capacity from further improvements
to the production process. Inventories have increased to $308,284 versus
$222,288 in the comparable 1997 period in preparation for the shift of
production to the newer headsets planned for introduction in the 3rd and 4th
quarters of fiscal year 1998. 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 39% or $52,705 over the
comparable period, $188,361 versus $135,656 in the comparable 1997 period. The
increase is due primarily to additional investments 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 and
increased 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.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
================================================================================
RESULTS OF OPERATION
- --------------------
Six months Ended April 30, 1998 Compared to three Months Ended April 30, 1997
For the six months ended April 30, 1998, the Company realized a net loss of
$(26,845) compared to a net loss of $ (20,054) for the period ended April 30,
1997.
Net sales for the current fiscal year 1998 period were $102,067 or 26% higher
than last year's comparable period, $491,959 in the current period versus
$389,892 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 33% in total
units shipped over the same comparable period. All revenues for the period
November 1, 1997 through April 30, 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 15% to 25% 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 focusing on other targeted markets. The Company will also introduce a new
product to the telephone market called the APEX. It is will be formally
introduced in the third 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 third 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 4th quarter of fiscal year
1998.
The Company maintained its gross profit of approximately 70% in the current
period. This achieved target is the result of the Company's commitment to keep
production costs at a minimum. In addition, the Company reduced its direct labor
requirements and yet increased its production capacity from further improvements
to the production process. Inventories have increased to $308,284 versus
$222,288 in the comparable 1997 period in preparation for the shift of
production to the newer headsets planned for introduction in the 3rd and 4th
quarters of fiscal year 1998. 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 27% or $82,166 over the
comparable period, $381,303 versus $299,137 in the comparable 1997 period. The
increase is due primarily to additional investments 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 and
increased Sales and Marketing to support additional telemarketing and
promotional expenses related to the Freedom market introduction. In addition to
expenses of $8,000 incurred from attending and promoting the Company at the
McDonald's International Trade Show. 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 9.25 to
1.00 at April 30, 1998 as compared to 16.96 to 1.00 at April 30, 1997. At April
30, 1998, the Company's current assets exceeded its current liabilities by
approximately $933,953.
The Company intends to use the cash it generates from operations and the net
proceeds from 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 June 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 June 12, 1998
- -------------------------- and Chairman of the Board
Keith Larkin (Principal Executive, Financial
and Accounting Officer)
/s/ Kenneth Campbell Director, Secretary June 12, 1998
- -------------------------- and Vice President of
Kenneth Campbell Operations
</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 SIX MONTHS ENDED
APRIL 30, 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> APR-30-1998
<CASH> 145,847
<SECURITIES> 257,936
<RECEIVABLES> 286,415
<ALLOWANCES> 12,095
<INVENTORY> 308,284
<CURRENT-ASSETS> 1,047,085
<PP&E> 189,122
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,236,207
<CURRENT-LIABILITIES> 104,332
<BONDS> 0
0
0
<COMMON> 4,254
<OTHER-SE> 1,122,018
<TOTAL-LIABILITY-AND-EQUITY> 1,131,876
<SALES> 491,959
<TOTAL-REVENUES> 502,838
<CGS> 148,380
<TOTAL-COSTS> 380,052
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (25,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,594)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
