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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
PROTECH COMMUNICATIONS, INC.
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(Exact name of small business issuer as specified in its charter)
FLORIDA 59-3281593
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3311 INDUSTRIAL 25TH STREET, FORT PIERCE, FLORIDA 34946
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(Address of principal executive offices)
(561) 464-5100
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(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 last predictable date:
Number of Shares Outstanding
Class on September 14, 2000
----- ----------------------------
Common stock, Par Value $.001 Per Share 4,266,000
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PRO TECH COMMUNICATIONS, INC.
Index
Page
----
Part I Financial Information
Item 1 Financial Statements
Balance Sheets at July 31, 2000
and 1999 (Unaudited) 3
Statements of Operations
for the Three months ended July 31,
2000 and 1999 (Unaudited) 4
Statements of Operations
for the Nine months ended July 31,
2000 and 1999 (Unaudited) 5
Statements of Cash Flows
for the Nine months ended July 31,
2000 and 1999 (Unaudited) 6
Notes to Financial Statements
(Unaudited) 7
Item 2 Management's Discussion and Analysis or
Plan of Operation 10
Part II OTHER INFORMATION
Item 4 Submission of matters to a vote of Security
Holders 12
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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PRO TECH COMMUNICATIONS, INC.
BALANCE SHEETS
July 31, 2000 and July 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
2000 1999
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ......................................... $ 136,503 $ 49,513
Short-term Investments ............................................ -- 147,652
Deposits being held ............................................... 12,810 --
Accounts receivable less allowance for doubtful
accounts of $18,661 and $14,868 in 2000 and 1999, ................. 403,316 150,716
Inventory (note 2) ................................................ 523,762 378,715
Other current assets .............................................. 91,682 64,474
----------- -----------
Total current assets ............................................ $ 1,168,073 $ 791,070
Net property and equipment ........................................ 262,735 202,771
Due from officer .................................................. 43,743 42,860
----------- -----------
$ 1,474,551 $ 1,036,701
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current short-term borrowings (note 4) ............................ $ 183,500 $ --
Current portion of capital lease obligations ...................... 8,808 --
Notes Payable (note 5)............................................. 449,975
Accounts Payable .................................................. 109,334 72,155
Accrued Expenses (note 3) ......................................... 135,418 201,904
----------- -----------
Total current liabilities ....................................... $ 887,035 $ 274,059
Capital Lease Obligations ...................................................... 1,945 --
----------- -----------
Total liabilities ................................................. $ 888,980 $ 274,059
Stockholder's Equity:
Common Stock, $.001 par value, authorized 10,000,000 shares, issued
and outstanding 4,266,000 in the current fiscal year and 4,254,000
for the comparable period ......................................... 4,266 4,254
Additional Paid in Capital ........................................ 1,141,566 1,137,018
Retained Earnings(deficit) ........................................ (560,261) (378,630)
----------- -----------
Total Stockholders' Equity ........................................ $ 585,571 $ 762,642
----------- -----------
$ 1,474,551 $ 1,036,701
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</TABLE>
See accompanying notes to financial statements
3
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PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
Three months ended July 31, 2000 and July 31, 1999
(unaudited)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
2000 1999
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<S> <C> <C>
Net Sales .......................................... $ 506,826 $ 269,379
Cost of Goods Sold ................................. 163,909 95,345
----------- -----------
Gross Profit ......................... $ 342,917 $ 174,034
Selling, general and administrative expenses ....... 351,174 240,364
----------- -----------
(Loss) from operations ............... $ (8,257) $ (66,330)
Other income (expense):
Interest income ...................... 114 1,699
Interest expense ..................... (10,990) --
----------- -----------
(Loss) before income taxes $ (19,133) $ (64,631)
Income taxes ....................................... 0 0
----------- -----------
Net (Loss) ............... $ (19,133) $ (64,631)
=========== ===========
Income (loss) per common share:
Basic ................................ $ (0.00) $ (0.02)
=========== ===========
Average common shares outstanding .................. 4,266,000 4,254,000
=========== ===========
</TABLE>
See accompanying notes to financial statements
4
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PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
Nine months ended July 31, 2000 and July 31, 1999
(unaudited)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
2000 1999
----------- -----------
<S> <C> <C>
Net Sales .......................................... $ 1,025,164 $ 769,624
Cost of Goods Sold ................................. 288,210 288,420
----------- -----------
Gross Profit ......................... $ 736,954 $ 481,204
Selling, general and administrative expenses ....... 861,521 676,383
----------- -----------
(Loss) from operations ............... $ (120,021) $ (195,179)
Other income (expense):
Interest income ...................... 1,512 8,768
Interest expense ..................... (23,922) --
----------- -----------
(Loss) before income taxes $ (146,977) $ (186,411)
Income taxes ....................................... 0 0
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Net (Loss) ............... $ (146,977) $ (186,411)
=========== ===========
Loss per common share:
Basic ................................ $ (0.03) $ (0.04)
=========== ===========
Average common shares outstanding .................. 4,266,000 4,254,000
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
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PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
For the Nine months ended July 31, 2000 and July 31, 1999
(unaudited)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from operating activities:
Cash received from the sale of merchandise ................... $ 810,359 $ 830,714
Cash paid to vendors and employees ........................... (1,370,566) (1,045,982)
Interest received ............................................ 1,512 8,768
Interest paid ................................................ (944) --
----------- -----------
Net cash used by operating activities ............ $ (559,639) $ (206,500)
----------- -----------
Cash flows from investing activities
Proceeds on maturity of short-term investments ............... -- --
Purchase of property and equipment ........................... $ (96,866) $ 106,993
----------- -----------
Net cash provided (used) in investing activities.. $ (96,866) $ (49,677)
----------- -----------
Cash flows from financing activities:
Proceeds of short-term borrowings ............................ $ 636,109 $ 57,316
Proceeds from long-term borrowings ........................... 0 --
Proceeds from exercised stock options ........................ 4,560 --
Payments of capital lease obligations ........................ (8,089) --
----------- -----------
Net cash provided by financing activities ........ $ 632,580 --
----------- -----------
Net (decrease) in cash and cash equivalents ...... $ (23,925) $ (149,184)
Cash and cash equivalents at the beginning of period ....................... 160,428 198,797
----------- -----------
Cash and cash equivalents at the end of period ............................. $ 136,503 $ 49,513
=========== ===========
Reconciliation of net income(loss) to net cash used by operating activities:
Net income(loss) ........................................................... $ (146,977) $ (186,411)
----------- -----------
Adjustments to reconcile net income(loss) to net cash used by operating
activities:
Depreciation and amortization ................................ $ 30,878 $ 28,175
Decrease(increase) in accounts receivable .................... (197,393) 64,110
Increase in inventory ........................................ (237,879) (133,105)
Increase in accounts payable ................................. 6,596 35,775
Increase in accrued expenses ................................. 36,975 28,439
Increase in other assets ..................................... (51,839) (43,483)
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Total adjustments ................................ $ (412,662) $ (20,089)
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Net cash used by operating activities ............ $ (559,639) $ (206,500)
=========== ===========
</TABLE>
See accompanying notes to financial statements
6
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PRO TECH COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(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, 2000 and the results of operations and
cashflows for the three months ended and nine months ended July
31, 2000. The accompanying interim financial statements should
be read in conjunction with the Company's Form 10-KSB filing for
the year ended October 31, 1999.
(C) LOSS PER SHARE
Earnings per share is accounted for by using the basic and
diluted earnings per share method perscribed by SFAS No. 128,
which became effective for years ending after December 15,1997.
Basic loss per share is based on the weighted average number of
shares of common stock outstanding during the year. Diluted loss
per share is based on shares of common stock and dilutive
potential common stock (stock Options and Stock Warrants)
outstanding during the year. Diluted loss per share was
antidilutive due to the net loss generated by the Company
during the 2000 and 1999 and is therefore not reported.
(D) COMPREHENSIVE INCOME
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). During the nine months ended July
31, 2000 and 1999, the Company had no components considered to
be other comprehensive income.
7
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(2) INVENTORY
Inventory at July 31, 2000 and 1999 consists of the following:
2000 1999
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Raw materials $127,687 $131,358
Work in process 99,508 116,313
Finished goods 296,567 130,906
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$523,762 $378,715
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(3) ACCRUED EXPENSES
Accrued expenses consisted of the following at July 31, 2000 and
1999:
2000 1999
-------- --------
Accrued warranty expense $ 78,038 $174,246
Other accrued expenses . 57,380 27,658
-------- --------
$135,418 $201,904
======== ========
(4) SHORT-TERM BORROWINGS
The December 22, 1999 the Company entered into a short-term
factoring arrangement providing for advances of up to $300,000
based on 80% of selected accounts receivable factored under the
agreement on a recourse basis. The Company is charged a
factoring fee of 1% on each advance, plus 2% per month on
advances outstanding. In addition, the minimum fee charged per
month is 1% of the factoring plan, or $3,000, during the life of
the agreement, which is for six months and automatically
renewable for additional six month terms, unless terminated by
the Company with a 30-day notice. The Company's obligations are
collateralized by all of the Company's accounts receivable,
inventory, and equipment.
(5) NOTES PAYABLE
On March 27, Pro Tech Communications, Inc. received a loan of
$150,000 from Westek Communications. The loan has an 8.5%
interest rate payable when the loan is due. The term of this
loan is for one year and due March 27, 2001.
On June 6, Pro Tech Communications, Inc. received a loan of
$100,000 from Balmore, S.A. The maturity of the loan is ninety
days, or due September 1, 2000. The loan has a 10% interest rate
from the maturity date until the loan is paid in full.
8
<PAGE> 9
On June 7, Pro Tech Communications, Inc. received a loan of
$100,000 from Austost Anstalt Schaan. The maturity of the loan
is ninety days, or due September 1, 2000. The loan has a 10%
interest rate from the maturity date until the loan is paid in
full.
On July 6, Pro Tech Communications, Inc. received a loan of
$99,975 from Zakeni Limited. The maturity of the loan is ninety
days, or due October 1, 2000. The loan has a 10% interest rate
from the maturity date until the loan is paid in full.
(6) SUBSEQUENT EVENT
Subject to the completion of certain closing conditions, on
September 13, 2000, Pro Tech Communications, Inc., and NCT
Hearing Products, Inc. ("NCT") entered into a stock purchase
agreement and a license agreement, pursuant to which Pro Tech
Communications, Inc. has agreed to issue to NCT approximately
22.5 million shares of the common stock of Pro Tech
Communications, Inc., representing 60% of its outstanding common
stock on a fully diluted basis. As consideration for the
issuance of such shares, NCT granted Pro Tech Communications,
Inc. an exclusive license to use certain intellectual property
of NCT in connection with the telephone headset products of Pro
Tech Communications, Inc. As part of the transaction, three
representatives of NCT will be appointed to the Board of
Directors of Pro Tech Communications, Inc., thereby giving NCT
control of the five-person Board of Directors of Pro Tech
Communications, Inc.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
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QUARTER ENDED JULY 31, 2000 AS COMPARED TO THE YEAR ENDED JULY 31, 1999:
For the quarter ended July 31, 2000, the Company realized a net loss of
$(19,133) compared to a net loss of $(64,631) for the quarter ended July
31,1999. The current reporting year loss improved as result of an increase of
sales of the Company's new telephone products along with maintaining the current
spending levels to the operation.
Net sales for the current period were 88% above the comparable 1999 period,
$506,826 versus $269,379 respectively. These sales resulted from the market
introduction of the Company's telephone headsets products targeted for the
telephone headset user. Sales were to several small office and call-center
environments. The Company hopes to continue to expand the penetration of this
market through its existing direct and distributor channels. In addition, the
Company has increased shipments this quarter as a result of a marketing
agreement with Hello-Direct, a large manufacturer and distributor of telephone
headsets and telephony equipment, to market and sell Pro Tech's Trinity headset.
The agreement provides the market and distribution of headsets through
Hello-Direct's large catalog distribution channel. In addition the Company has
begun the sale on its own of this new telephone headset, the Trinity, to several
customers. Several of these customers responded positively to this headset. The
Company expects sales to increase upon the market introduction of several new
products planned for sale during the fourth quarter of the current fiscal year.
Although this is the Company's intention, there can be no assurances that such
sales will occur in the fourth quarter or at any time in the future.
The Company continued the sale of its fast food products through distributors
augmenting these sales with direct sales from the Company's own outbound
telemarketing operation. Sales remained strong in this market particularly
through the Company's distributor sales channel. In addition, the Company
continues to benefit from a previously announced market introduction of colored
headsets at the International McDonald's Convention.
Gross margin percent improved 3.06% to 67.66% versus 64.60% in the comparable
1999 period as result of the cost savings from the transition of all production
offshore to the Far East. This action showed a major reduction in cost of goods
produced through the Company's now established Far East manufacturing partners.
However this improvement was offset by the need to continue to produce some
sub-assemblies at the Company's corporate offices in order to support the
dramatic increase in sales this quarter. The Company plans to keep the same
supply-chain and manufacturing process in place for all existing and new
products planned for market introduction in the 4th quarter of the current
fiscal year. Selling, general and administrative expenses (SG&A) for the fiscal
year were $351,174 or 69% of revenues versus $240,364 or 89% in revenues in the
comparable 1999 period. This increase of $180,592 was the result of the
Company's increasing expenditures in marketing and sales relating to the
expansion into the telephone headset market.
The Company increased its total marketing and associated advertising expenses to
$109,940 with $97,266 in the comparable 1999 period to support several telephone
trade shows attended by the Companies marketing staff. These trade shows allowed
the Company the opportunity to successfully present the new products planned for
market introduction in the current fiscal year along with the opportunity to
perform needed market research necessary to have successful product
introductions in the future. The Company also incurred one-time charges of
$15,000 in support of an existing investment banking relationship.
The Company has continued its investment in Research and Development and new
product development accounting for investments in mold designs and component
testing. The Company is also reviewing several possible alliances with companies
that have complimentary products, which could provide access into several key
accounts in the telephone market. Although this is the Company's intention,
there are no formal agreements in place and no assurances can be given that they
will occur in the future. Net depreciation expenses increased to $10,371 or 2.1%
of revenues in the current fiscal year versus $9,942 or 3.6 % of revenues in the
comparable 1999 period. This increase was as a result of an increased investment
in production molding associated with new product development.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS (CONTINUED)
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NINE MONTHS ENDED JULY 31, 2000 AS COMPARED TO THE YEAR ENDED JULY 31, 1999:
For the nine months ended July 31, 2000, the Company realized a net loss of
$(146,977) compared to a net loss of $(186,411) for the nine months ended July
31,1999. The current reporting year loss improved as result of an increase of
sales of the Company's new telephone products along with maintaining the current
spending levels to the operation.
Net sales for the current period were 33% above the comparable 1999 period,
$1,025,164 versus $769,624, respectively. These sales resulted from the market
introduction of the Company's telephone headsets products targeted for the
telephone headset user. Sales were to several small office and call-center
environments. The Company hopes to continue to expand the penetration of this
market through its existing direct and distributor channels. In addition, the
Company continues to benefit from an expanded marketing agreement with
Hello-Direct, a large manufacturer and distributor of telephone headsets and
telephony equipment, to market and sell Pro Tech's Trinity headset. The
agreement provides the market and distribution of headsets through
Hello-Direct's large catalog distribution channel. In addition the Company has
begun the sale on its own of this new telephone headset, the Trinity, to several
customers. Several of these customers responded positively to this headset. The
Company expects sales to increase upon the market introduction of several new
products planned in the fourth quarter of the current fiscal year. Although this
is the Company's intention, there can be no assurances that such sales will
occur in the fourth quarter or at any time in the future.
Gross margin percent improved 9.36% to 71.88% versus 62.52% in the comparable
1999 period primarily as a result of an adjusting entry of cost of good expenses
accrued in the previous year offset this year along with the cost savings from
the transition of all production offshore to the Far East. This action showed a
major gain in cost of goods produced through the Company's now established Far
East manufacturing partners. The Company plans to keep this same supply-chain in
place for all current and new products planned for market introduction in the
4th quarter of the current fiscal year. Selling, general and administrative
expenses (SG&A) for the fiscal year were $861,521 or 84% of revenues versus
$676,383 or 88% in revenues in the comparable 1999 period. This decrease was the
result of the Company's goal to control existing spending levels corresponding
increase in net sales.
The Company increased its total marketing and advertising expenses at $129,856
with $112,614 in the comparable 1999 period to support several telephone trade
shows attended by the Companies marketing staff. These trade shows allowed the
Company the opportunity to successfully present the new products planned for
market introduction in the 2nd quarter of the current fiscal year along with the
opportunity to perform needed market research necessary to have successful
product introductions in the future.
The Company has continued its investment in Research and Development and new
product development accounting for investments mold designs and component
testing. The Company is also reviewing several possible alliances with companies
that have complimentary products which could provide access into several key
accounts in the telephone market. Although this is the Company's intention,
there are no formal agreements in place and no assurances can be given that they
will occur in the future. Net depreciation expenses increased to $30,878 or 3.0%
of revenues in the current fiscal year versus $28,175 or 3.7% of revenues in the
comparable 1999 period. This increase was as a result of an increased investment
in production molding associated with new product development.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION (CONTINUED)
==============================================================================
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio (current assets to current liabilities) was 1.32 to
1.00 at July 31, 2000 as compared to 2.88 to 1.00 at July 31, 2000. At April 31,
2000, the Company's current assets exceeded its current liabilities by
approximately $281,038.
During the current fiscal year, the Company has funded its working capital
requirements with cash flow from operations and short-term borrowings.
Management does not believe that the Company has sufficient funds to meet the
Company's anticipated working capital requirements for the next 12 months and
therefore on December 22, 1999, the Company entered into a short-term factoring
arrangement providing for advances of up $300,000, based on 80% of selected
accounts receivable factored under the agreement on a recourse basis. The
Company is charged a factoring fee of 1% of each advance, plus 2% per month on
advances outstanding. In addition, the minimum fee charged per month is 1% of
the total factoring plan, or $3,000, during the life of the agreement, which is
for six months and automatically renewable for an additional six month terms,
unless terminated by the Company with 30 days notice. The Company's obligations
are collateralized by all of the Company's account receivable, inventory, and
equipment. On March 14, 2000, the Company obtained a net advance of $339,446
under the agreement.
In addition, 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, on March 27,
2000, obtained a loan from Westek Communications Inc. for $150,000 payable in
one year with an interest rate of 8.5%. This capital will fund existing product
development along with the associated market introduction and promotion of these
new products. It is anticipated that the Company will seek to raise additional
financing as a result of its relationship with NCT Hearing Products, Inc. and
its parent company NCT Group, Inc. On June 7, and July 7, 2000, the Company
obtained bridge financing of $299,975 through the NCT Group, Inc. in order to
support existing product development and working capital requirements.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
12
