UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Pro Tech Communications, Inc.
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(Exact name of registrant as specified in its charter)
Florida 59-3281593
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4492 Okeechobee Rd 34947
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(Address of principal executive offices) (Zip Code)
(772) 464-5100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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. /X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
33,200,311 shares outstanding as of August 6, 2002
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
December 31, June 30,
2001 2002
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ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 46,881 $ 57,526
Accounts receivable, less allowance for doubtful
accounts of $24,784 and $24,031, respectively 219,434 163,952
Inventories (Note 4) 945,744 714,454
Due from officers and employees 2,876 103
Other current assets (Note 6) 5,926 15,743
-------------- -------------
Total current assets 1,220,861 951,778
Property and equipment, net (Note 5) 756,365 680,588
Intangible assets, net of accumulated amortization of $1,164,821
and $1,630,749, respectively (Note 3) 15,142,671 14,676,743
Note receivable from former officer 59,670 61,314
Other assets 5,353 3,484
-------------- -------------
$ 17,184,920 $ 16,373,907
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 546,917 $ 480,719
Accrued expenses (Note 7) 199,526 200,465
Current portion of capital lease obligations 10,083 9,922
Other liabilities (Note 8) 620,172 916,371
Notes payable (Note 14) 173,299 186,189
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Total current liabilities 1,549,997 1,793,666
Capital lease obligations 36,021 36,698
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Total liabilities 1,586,018 1,830,364
Series B redeemable convertible preferred stock, $.01 par value,
$1,000 stated value, 500 shares authorized, issued and outstanding (Note 9) 633,438 643,357
Stockholders' equity (Notes 10 and 11):
Preferred stock, $.01 par value, authorized 998,000 shares, none issued and outstanding - -
Series A convertible preferred stock, $.01 par value, $1,000 stated
value, authorized 1,500 shares, issued and outstanding 50 shares 52,521 53,512
Common stock, $.001 par value, authorized 40,000,000 shares,
issued and outstanding 33,200,311 shares 33,200 33,200
Additional paid-in-capital 18,473,079 18,462,168
Accumulated deficit (3,593,336) (4,648,694)
-------------- -------------
Total stockholders' equity 14,965,464 13,900,186
-------------- -------------
$ 17,184,920 $ 16,373,907
============== =============
The accompanying notes are an integral part of the condensed financial statements.
2
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- -----------------------------
2001 2002 2001 2002
------------- ------------ ------------ --------------
Net sales $ 634,949 $ 439,212 $ 1,252,970 $ 883,008
Cost of goods sold 205,823 197,440 426,359 373,812
------------- ------------- ------------- -------------
Gross profit 429,126 241,772 826,611 509,196
Selling, general and administrative 935,959 732,437 1,673,223 1,550,635
------------- ------------- ------------- -------------
Loss from operations (506,833) (490,665) (846,612) (1,041,439)
Other income/(expense):
Interest income (476) 839 2,083 1,624
Interest expense (11,237) (13,002) (9,077) (19,663)
Other miscellaneous - 3,603 637 4,120
------------- ------------- ------------- -------------
Net loss (518,546) (499,225) (852,969) (1,055,358)
Adjustments attributable to preferred stock (Notes 9, 10 and 11):
Preferred stock beneficial conversion feature - 15,582 - 40,844
Preferred stock dividend 3,630 5,485 14,393 10,911
------------- ------------ ------------ -------------
Net loss attributable to common stockholders $ (522,176) $ (520,292) $ (867,362) $ (1,107,113)
============= ============ ============ =============
Basic and diluted loss per share $ (0.02) $ (0.02) $ (0.03) $ (0.03)
============= ============ ============ =============
Weighted average common shares outstanding - basic and diluted 32,870,256 33,200,311 31,361,348 33,200,311
============= ============ ============ =============
The accompanying notes are an integral part of the condensed financial statements.
3
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) For the Six Months Ended
June 30,
---------------------------------------------
2001 2002
--------------------- ------------------
Cash flows from operating activities:
Net loss $ (852,969) $ (1,055,358)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Provision for doubtful accounts - 26,103
Depreciation and amortization 499,539 548,094
Gain on sale of fixed assets (350) -
Changes in operating assets and liabilities:
Decrease in accounts receivable 195,524 32,796
(Increase) decrease in inventories (109,249) 231,290
(Increase) decrease in receivable from officers and employees (3,953) 1,129
Increase in other assets (45,311) (7,948)
Increase (decrease) in accounts payable 1,845 (66,198)
Increase in accrued expenses 92,242 11,004
Increase in other liabilities 62,659 296,199
--------------------- ------------------
Net cash (used in) provided by operating activities $ (160,023) $ 17,111
--------------------- ------------------
Cash flows from investing activities:
Capital expenditures $ (508,157) $ -
Proceeds on sale of fixed asset 350 -
--------------------- ------------------
Net cash used in investing activities $ (507,807) $ -
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Cash flows from financing activities:
Proceeds from:
Notes payable $ 11,516 $ -
Payments made on:
Stock issuance costs on conversion of preferred stock (23,900) -
Capital lease obligations and notes payable (930) (6,466)
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Net cash used in financing activities $ (13,314) $ (6,466)
--------------------- ------------------
Net (decrease) increase in cash and cash equivalents $ (681,144) $ 10,645
Cash and cash equivalents - beginning of period 776,381 46,881
--------------------- ------------------
Cash and cash equivalents - end of period $ 95,237 $ 57,526
===================== ==================
Supplemental disclosures of cash flow information: Cash paid during the six
months ended for:
Interest $ - $ 5,540
===================== ==================
Supplemental disclosures of non-cash investing and financing activities:
Pro Tech adjusted the carrying value of preferred stock and additional paid-in
capital by $14,393 and $10,911 for the six months ended June 30, 2001 and
2002, respectively, for the 4% dividend attributable to preferred stock.
Pro Tech obtained an asset under a capital lease for $6,038 during the six
months ended June 30, 2002.
The accompanying notes are an integral part of the condensed financial statements.
4
PRO TECH COMMUNICATIONS, INC.
JUNE 30, 2002
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation:
Throughout this document, Pro Tech Communications, Inc. is referred to as
"we," "our," "the Company" or "Pro Tech." The accompanying condensed financial
statements are unaudited but, in the opinion of management, contain all
adjustments (consisting of those of a normal recurring nature) considered
necessary to present fairly the financial position and the results of operations
and cash flows for the periods presented in conformity with generally accepted
accounting principles in the United States of America applicable to interim
periods. The results of operations and cash flows for the three and six months
ended June 30, 2002 are not necessarily indicative of the results for any other
interim period or the full year. These financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates. We have reclassified some amounts in prior period financial
statements to conform to the current period's presentation.
2. Loss Per Share:
We report loss per common share in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The per share
effects of potential common shares such as warrants, options, convertible debt
and convertible preferred stock have not been included, as the effect would be
antidilutive.
3. Recent Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires the purchase method of accounting be used for all business
combinations subsequent to June 30, 2001 and specifies the criteria for the
recognition of intangible assets acquired in a business combination. Under SFAS
142, we will be required to reassess the value of goodwill and other intangible
assets previously recorded in connection with prior acquisitions, as well as
their useful lives. SFAS 142 is effective for fiscal years beginning after
December 15, 2001 and will require that goodwill not be amortized, but rather be
subject to an impairment test at least annually. Separately identified and
recognized intangible assets resulting from business combinations completed
before July 1, 2001 that do not meet the new criteria for separate recognition
of intangible assets will be subsumed into goodwill upon adoption. In addition,
the useful lives of recognized intangible assets acquired in transactions
completed before July 1, 2001 will be reassessed and the remaining amortization
periods adjusted accordingly. Adoption of SFAS 141
5
did not have a significant impact on our financial statements. Adoption of SFAS
142 required us to evaluate the future cash flows of those products identified
as using the patent rights included under our intangible asset. Using the
guidelines in SFAS 142 for intangible assets with finite lives, the estimated
future cash flows were determined in accordance with SFAS 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The estimated future cash
flows were then compared to the carrying value of our intangible asset. As of
January 1, 2002, we did not have an impairment on the intangible asset. In
accordance with SFAS 142, we will continue to monitor activities associated with
our intangible asset for possible impairments.
4. Inventories:
Inventories consisted of the following:
December 31, June 30,
2001 2002
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Finished goods $ 609,852 $ 464,560
Raw materials 273,202 220,924
Work in progress 62,690 28,970
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Total Inventories $ 945,744 $ 714,454
====================== ===================
5. Property and Equipment, net:
Property and equipment, net consisted of the following:
December 31, June 30,
2001 2002
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Production molds $ 454,076 $ 454,076
Office equipment 146,556 146,556
Production equipment 39,514 39,514
Leased equipment 79,235 85,273
Leasehold improvements 315,050 315,050
Vehicles 12,414 12,414
Marketing displays 16,160 16,160
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Total cost 1,063,005 1,069,043
Less accumulated depreciation
and amortization 306,640 388,455
--------------- -------------------
Total Property and equipment, net $ 756,365 $ 680,588
=============== ===================
Depreciation expense for the six months ended June 30, 2001 and 2002 was
$33,260 and $81,815, respectively.
6
6. Other Current Assets:
Other current assets consisted of the following:
December 31, June 30,
2001 2002
---------------- -------------------
Prepaid inventory purchases $ - $ 9,680
Deposits on leased equipment 5,926 6,063
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Total Other current assets $ 5,926 $ 15,743
================ ===================
7. Accrued Expenses:
Accrued expenses consisted of the following:
December 31, June 30,
2001 2002
----------------- --------------
Accrued warranty expense $ 96,391 $ 84,195
Accrued payroll and related expenses 43,670 68,394
Accrued vacation 24,205 25,406
Accrued lease payable 14,565 17,263
Other accrued expenses 20,695 5,207
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Total Accrued expenses $ 199,526 $ 200,465
================= ==============
8. Other Liabilities:
Other liabilities consisted of the following:
December 31, June 30,
2001 2002
------------------ --------------
Due to NCT Group, Inc. $ 195,298 $ 382,792
Due to NCT Hearing Products, Inc. 325,733 459,364
Due to NCT Europe 35,111 35,111
Due to Factor (see Note 12) 64,030 39,104
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Total Other liabilities $ 620,172 $ 916,371
================== ==============
On March 31, 2002, $453,027, representing the amount due to NCT Hearing at
March 31, 2002, was established as a promissory note bearing interest at 4.75%,
due on March 31, 2003. Such amount is included in the $459,364 Due to NCT
Hearing at June 30, 2002, noted above.
9. Series B Redeemable Convertible Preferred Stock:
On July 30, 2001, we entered into an agreement to issue 500 shares of
Series B Redeemable Convertible Preferred Stock (Preferred Stock-B) for
$500,000. We received
7
approximately $419,000 in cash, net of fees and expenses, in exchange for the
Preferred Stock-B. The Preferred Stock-B has a dividend of 4% per annum on the
stated value, payable upon conversion or exchange in either cash or common
stock. Under such agreement, the shares of Preferred Stock-B may be converted
into shares of Pro Tech common stock or exchanged for shares of common stock of
our ultimate parent NCT Group, Inc. ("NCT"). The conversion rate into Pro Tech
common stock is the lesser of: (i) the lowest average closing bid price for a
share of Pro Tech common stock for any consecutive five-day period out of 15
trading days preceding the date of such conversion, less a discount of 20%; or
(ii) $0.25. The exchange rate into NCT common stock is the lowest average of the
average closing bid price for a share of NCT common stock for any consecutive
five trading days out of the 15 trading days preceding the date of exchange,
less a discount of 20%. In accordance with Emerging Issues Task Force ("EITF")
98-5, as codified in EITF 00-27, we recorded a beneficial conversion feature of
$125,000 in connection with the Preferred Stock-B issuance. This entry was a
reduction to the outstanding balance of the preferred stock and an increase to
additional paid-in capital. The beneficial conversion feature is to be
recognized as an increase to preferred stock and a decrease to additional
paid-in capital over the period from the date of issuance to the date of
earliest conversion (50% on January 30, 2002 and 50% on July 30, 2002). The
entire amount of this beneficial conversion was recognized as of December 31,
2001 due to the redemption rights of the holders (see below).
For purposes of determining net loss attributable to common stockholders,
we calculated the dividends earned by holders of Preferred Stock-B. Using a
cumulative dividend of 4% per annum on the stated value, which is payable upon
conversion or exchange in either cash or common stock, dividends on the
Preferred Stock-B were $4,986 and $9,920 for the three and six-month periods
ended June 30, 2002, respectively.
We have classified the Preferred Stock-B as temporary equity rather than
stockholders' equity because, at June 30, 2002, under the terms of the
agreements entered into in connection with the issuance of the Preferred
Stock-B, the holders of those shares may have had a right to require Pro Tech to
redeem the shares. Because any such redemption would not be within the sole
control of Pro Tech, Rule 5-02.28 of Regulation S-X applies and mandates
treatment of the shares as temporary equity.
The Preferred Stock-B is carried on our balance sheet as of June 30, 2002
at $643,357, the redemption value, which is comprised of 125% of the stated
value of $500,000; plus accrued dividends of $18,357.
As of June 30, 2002, none of the Preferred Stock-B had been converted into
Pro Tech common shares or exchanged into NCT common shares.
8
10. Stockholders' Equity:
The changes in stockholders' equity during the six months ended June 30,
2002, were as follows:
Balance Exchange/ Dividend on Balance
at Conversion of Preferred Net At
12/31/01 Preferred Stock Stock Loss 6/30/02
------------ --------------- ------------- ---------------- ------------------
Series A preferred stock: Shares 50 - 50
Amount $ 52,521 - 991 - $ 53,512
Common stock: Shares 33,200,311 - - - 33,200,311
Amount $ 33,200 - - - $ 33,200
Additional paid-in capital: $ 18,473,079 - (10,911) - $ 18,462,168
Accumulated deficit: $ (3,593,336) - - (1,055,358) $ (4,648,694)
11. Capital Stock:
Series A Convertible Preferred Stock
On September 29, 2000, Pro Tech entered into an agreement to issue 1,500
shares of Series A Convertible Preferred Stock (Preferred Stock-A) for
$1,500,000. We received $1,200,025 cash and satisfied $299,975 of notes payable
in exchange for the Preferred Stock-A. The Preferred Stock-A has a dividend of
4% per annum on the stated value, payable upon conversion or exchange in either
cash or common stock. Under such agreement, the shares of Preferred Stock-A may
be converted into shares of Pro Tech common stock or exchanged for shares of NCT
common stock. The conversion rate into Pro Tech common stock is the lesser of:
(i) the lowest average closing bid price for a share of Pro Tech common stock
for any consecutive five-day period out of 15 trading days, less a discount of
20%; or (ii) $0.50. The exchange rate into NCT common stock is the lowest
average the closing bid price for a share of NCT common stock for any
consecutive five trading days out of the 15 trading days preceding the date of
exchange, less a discount of 20%. In accordance with EITF 98-5, as codified in
EITF 00-27, we recorded a beneficial conversion feature of $375,000 in
connection with the Preferred Stock-A issuance. Because these shares were
convertible immediately upon issuance, we recognized the entire beneficial
conversion amount on the date of issuance.
Pro Tech, at its option, may redeem up to $500,000 of the Preferred Stock-A
if the closing bid price of Pro Tech's common stock is less than $0.50 per
share. The redemption price is equal to 125% of the stated value plus 100% of
the cumulative 4% dividend. The stock may be redeemed at the holders' option if
two-thirds of all Preferred Stock-A holders require such redemption upon certain
events of noncompliance with the terms of the Series A Preferred Stock Purchase
Agreement or Registration Rights Agreement. Any outstanding shares will be
mandatorily converted on March 31, 2005.
9
For purposes of determining net loss attributable to common stockholders,
we calculated the dividends earned by holders of Preferred Stock-A. Using a
cumulative dividend of 4% per annum on the stated value, which is payable upon
conversion or exchange in either cash or common stock, dividends on the
Preferred Stock-A were $498 and $991 for the three and six-month periods ended
June 30, 2002, respectively.
During the six-month period ended June 30, 2002, there were no shares of
Preferred Stock-A converted into Pro Tech common stock or exchanged into NCT
common stock.
Common Stock
The number of shares of common stock required to be reserved for issuance
was approximately 300 million at June 30, 2002. This reserve includes amounts
for the conversion of preferred stock and for the exercise of options and
warrants. In addition, the required reserve includes approximately 215 million
shares for the exchange of $11,702,398 worth of NCT convertible notes payable,
plus accrued interest, into Pro Tech common stock. These notes give the holder
the right, among other rights, to exchange such notes into Pro Tech common stock
at prices ranging from $0.03 to $0.14 per share (see also Note 15. Subsequent
Events).
Stock Options
On February 1, 2002, Pro Tech issued options to the Chairman of the Board
of Directors to purchase up to 250,000 shares at an exercise price of $0.06 per
share under the 1998 Stock Option Plan, which options vested immediately upon
issuance and expire on February 1, 2009.
In addition, Pro Tech modified the 540,000 options that were granted to the
Chairman on June 1, 2001 to exclude the clause under which the options would
expire upon termination of employment. Although the change in the termination
clause was a modification of the original grant, there was no accounting
consequence because the market price on the date of such modification was lower
than the original exercise price of the grant.
Authorized Shares
Effective February 14, 2002, the Pro Tech Board of Directors approved an
increase in the number of authorized shares of common stock from 40 million to
300 million, and approved an increase in the number of shares of common stock
available for issuance under the 1998 Stock Option Plan from 2 million to 30
million. On April 12, 2002, Pro Tech held its annual meeting of stockholders, in
connection with which the majority shareholder of Pro Tech also approved the
increases in authorized shares of common stock and in shares of common stock
available for issuance under the 1998 Stock Option Plan. The increase in
authorized shares will be effective upon acceptance by the Secretary of State of
Florida of Articles of Amendment to the Amended and Restated Articles of
Incorporation of Pro Tech. The increase in shares authorized for issuance under
the 1998 Stock Option Plan was effective immediately upon approval by the
majority shareholder.
10
12. Factoring Agreement:
Pro Tech is a party to a factoring agreement with Goodman Factors, Inc. The
agreement requires us to offer for factor substantially all of our trade
receivables on a non-recourse basis in return for immediate cash credit equal to
85% of these factored receivables, less factoring fee. The factoring fee is 1.9%
of the invoice amount, and interest at the rate of 3.5% over the prime rate on
the amount advanced under the factoring agreement. The prime rate was 4.75% at
June 30, 2002. In addition, at June 30, 2002 we had a "Reserve Account" in the
amount of $12,100 representing not less than 15% of the aggregate unpaid gross
amount of all accounts factored by Pro Tech under this factoring agreement. If
the net amount of accounts submitted for any one month does not exceed $100,000,
Goodman may charge an additional commitment fee, as described in the agreement.
As of June 30, 2002, no such fees were required. Such factored receivables are
subject to acceptance by Goodman. Goodman also has the option to accept factored
receivables with recourse. If such recourse receivables are not paid within 46
days, we must buy back the total outstanding receivable. Obligations due to the
factor under the factoring agreement are collateralized by a continuing security
interest in all of our accounts receivable, notes receivable, chattel paper,
documents, instruments and general intangibles now existing or hereafter
acquired of every kind wherever located, together with merchandise returns and
goods represented thereby, and all proceeds therefrom of every kind and nature.
At June 30, 2002, accounts receivable factored under this agreement and
still outstanding were $51,204, of which $39,104 had been received under the
recourse provisions, and is included in Other Liabilities (see Note 8. Other
Liabilities). Total fees and interest expense incurred under this arrangement
amounted to $1,592 and $727, respectively, during the three months ended June
30, 2002 and $3,425 and $1,540, respectively, during the six months ended June
30, 2002.
13. Business Segment Results
During 2001, management identified two new business segments in which the
company will direct its focus. These two business segments are: (i) the
Telecommunications Systems Integration Business Segment; and (ii) the Call
Center Operations Business Segment. As of June 30, 2002, neither of these
segments is deemed to be reportable segments in accordance with SFAS 131. Prior
to establishment of these two new business segments, Pro Tech was predominately
in the design, development, manufacture and marketing of lightweight
telecommunications headsets, currently known as the Product Business Segment. We
evaluate segment performance based on net sales and operating income. Management
does not track segment data or evaluate segment performance on additional
financial information. As such, there are no separately identifiable balance
sheet or statements of operations data (below operating income).
No geographic information is disclosed as our primary market and capital
investments were concentrated in the United States.
11
Business segment data is as follows:
Segment
------------------------------------------------------------------------------
Telecom
Product Systems Call Center Total
Business Integration Operations Segments
------------------------------------------------------------------------------
For the three months ended June 30, 2002:
Sales to external customers $ 460,855 32,357 - $ 493,212
Other revenue - other operating segments $ - - - $ -
Net (loss) income $ (471,923) 601 (27,903) $ (499,225)
For the three months ended June 30, 2001:
Sales to external customers $ 603,529 31,420 - $ 634,949
Other revenue - other operating segments $ - - - $ -
Net (loss) income $ (527,533) 9,287 (300) $ (518,546)
Segment information follows:
The company is divided into the following three business segments:
The Product Business Segment: We presently design, develop, manufacture and
market lightweight telecommunications headsets. Our headsets employ new concepts
in advanced lightweight design, and our marketing strategies involve the sale of
our product directly to the commercial headset market as a replacement for our
competitors' products. We presently sell our first design for the commercial
headset market comprised of fast-food companies and other large quantity users
of headset systems. We are also in the process of completing development of
several other headsets for the telephone user market, to include telephone
operating companies, government agencies, business offices, and professional
telephone centers.
The Telecommunications Systems Integration Business Segment: On March 1,
2001, we launched the Telecommunications Systems Integration Business to sell
and install simple to sophisticated analog, digital and Internet Protocol phone
systems. This decision was made to take advantage of increasing market demand
for telecommunications systems integration support to the small office and the
large corporate call center clients.
The Call Center Operations Business Segment: During 2001, we launched the
Call Center Operations Business. We have adopted and installed the latest
customer relationship management technologies and strategies in order to achieve
business segment objectives. As of December 21, 2001, we suspended operations in
the Call Center Operations Business due to poor performing contracts. We have
reorganized this business segment and intend to resume operations by the third
quarter of 2002.
12
14. Liquidity
Pro Tech has incurred recurring losses from operations since its inception,
aggregating approximately $4.6 million through June 30, 2002. These losses,
which include the cost for development of products for commercial use, have been
funded primarily from product sales and the sale of common stock and preferred
stock convertible into common stock.
In addition, Pro Tech had negative working capital of $841,888 at June 30,
2002, including the amount due to the NCT and other affiliated companies of
$877,267. Pro Tech has taken steps to reduce its working capital requirements.
These steps include the reorganization of the call center operations, the
reduction of work force levels in all areas of the products operations, and the
institution of tighter controls over all expenditures.
As a result of the restructuring that Pro Tech has put into place,
management believes Pro Tech will have sufficient funds to meet anticipated
working capital requirements for the next 12 months, provided NCT and other
affiliated companies do not require immediate payment on the amounts outstanding
(see Note 8. Other Liabilities).
As of June 30, 2002, Pro Tech was in default on the $176,584 note payable
to Westek Electronics, Inc. (included in Notes payable) plus accrued interest of
$3,783 (included in Accrued expenses). Pro Tech is in discussions with the
holder to extend the due date of the note. If the note is not extended, the
holder may start litigation proceedings for payment.
15. Subsequent Events
On July 12, 2002, Pro Tech, NCT and the holder of eight convertible notes
payable issued by NCT entered into an agreement. Under this agreement, the
holder of the notes payable waived her right to exchange such notes into Pro
Tech common shares. In consideration of these waivers, the holder was given a
warrant for 20 million shares of NCT common stock. As of June 30, 2002, these
convertible notes payable were exchangeable into Pro Tech common stock at prices
ranging from $0.03 to $0.14 per share, or a total of approximately 215 million
shares (see Note 11. Capital Stock).
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
JUNE 30, 2002
Description of Business
Pro Tech operates mainly in the lightweight headset industry. During 2001,
we expanded into the telecommunications systems integration business and the
call center operations business (see Note 13. Business Segments Results for
further discussion of these operations).
Pro Tech presently designs, develops, manufactures and markets lightweight
telecommunications headsets. Our headsets employ new concepts in advanced
lightweight design. Our marketing strategy involves the sale of our products
directly to the commercial headset market as a replacement for competitors'
products. We presently sell to the commercial headset market comprised of
fast-food companies and other large quantity users of headset systems. We have
recently completed development of several other headsets for the telephone user
market including telephone operating companies, government agencies, business
offices, and professional telephone centers.
There are two components to a complete telephone headset. The first is the
headset component that the user wears, consisting of a speaker and a microphone.
The second is the electronic amplifier which is relatively more complex, time
consuming and costly to produce as it requires many variations to interface with
the wide variety of telephone systems in the market and generates higher labor
and material costs. The electronic amplifier also generally offers lower profit
margins than the headset component. As a result, we have outsourced the
production of several amplifiers engineered to our specifications. We will
continue to concentrate our efforts on the production of that portion of the
telephone headset that the user wears.
Pro Tech will also continue to concentrate efforts on the production and
distribution of new headsets designed to connect to and interface with various
electronic amplifiers and telephone systems currently in use. We have adopted a
co-engineering product development strategy through the use of joint engineering
agreements with companies that have complimentary engineering patents. We
project that this strategy will greatly decrease the product development cycle
while offering superior products to our customers. We have continued to make
investments in technology and have incurred development costs with respect to
engineering prototypes, pre-production models and field testing of several new
products. Management believes that our investment in technology will result in
the improvement of the functionality, speed and cost of components and products.
14
Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document contains
such "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues and cash flow. Words such as "anticipates," "estimates,"
"expects," "projects," "intends," "plans," "believes," "will be," "will
continue," "will likely result," and words and terms of similar substance used
in connection with any discussion of future operating or financial performance
identify such forward-looking statements. Those forward-looking statements are
based on management's present expectations about future events. As with any
projection or forecast, they are inherently susceptible to uncertainty and
changes in circumstances, and Pro Tech is under no obligation to (and expressly
disclaims any such obligation to) update or alter its forward-looking statements
whether as a result of such changes, new information, future events or
otherwise.
Pro Tech operates in a highly competitive and rapidly changing environment
and business segments that are dependent on our ability to: achieve
profitability; achieve a competitive position in design, development, licensing,
production and distribution of electronic systems; produce a cost effective
product that will gain acceptance in relevant consumer and other product
markets; increase revenues from products; realize funding from product sales,
and engineering and development revenues, to sustain our current level of
operation; introduce, on a timely basis, new products; maintain satisfactory
relations with our customers; attract and retain key personnel; maintain and
expand our strategic alliances; and protect our know-how, and inventions. Pro
Tech's actual results could differ materially from management's expectations
because of changes in such factors. New risk factors can arise and it is not
possible for management to predict all such risk factors, nor can it assess the
impact of all such risk factors on the company's business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
Investors should also be aware that while the company might, from time to
time, communicate with securities analysts, it is against the company's policy
to disclose to them any material non-public information or other confidential
commercial information. Accordingly, investors should not assume that the
company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Furthermore, the company has a policy
against issuing or confirming financial forecasts or projections issued by
others. Thus, to the extent that reports issued by securities analysts or others
contain any projections, forecasts or opinions, such reports are not the
responsibility of the company.
In addition, Pro Tech's overall financial strategy, including growth in
operations, maintaining financial ratios and strengthening the balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions, economic
slowdowns and changes in Pro Tech's plans, strategies and intentions.
15
Results of Operations
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Net loss for the three months ended June 30, 2002 decreased $19,321, or 4%,
over the same three-month period in 2001 due to a decrease in selling, general
and administrative expenses of $203,522, offset by a decrease in the gross
profit margin of $187,354.
Total revenues for the three months ended June 30, 2002 decreased $195,737,
or 31%, compared to the same three months ended June 30, 2001. This decrease was
the result of a reduction in sales from our fast-food headsets.
Revenue from our fast-food headsets decreased approximately $176,000 due to
reduced purchases by three of our major distributors. This decrease was
primarily the result of slowed demand from their customer base. In addition, a
portion of this decrease was related to a component failure issue that we
experienced with one of our suppliers during the second quarter of 2001.
Although this component issue has been resolved, we continue to honor our
customer agreements by replacing headsets, therefore resulting in fewer new
sales to these customers. It is anticipated that the replacement of these units
will be completed during the third quarter 2002.
For the three months ended June 30, 2002, cost of goods sold decreased
$8,383, or 4%, compared to the same three-month period in 2001. This decrease
was due mainly to the decrease in sales volume for 2002, offset by additional
costs incurred to replace headsets mentioned above.
Gross profit margin for the three months ended June 30, 2002 was $241,772,
or 55%, as compared to $429,126, or 67% for the three months ended June 30,
2001. This decline was a result of an increase in production costs due to the
increase in domestic production to facilitate smaller production runs, along
with the additional cost effect of replacing headsets, as mentioned above.
For the three months ended June 30, 2002, selling, general and
administrative expenses decreased $203,522, or 22%, compared to the same
three-month period in 2001. In the first quarter 2002, Pro Tech implemented cost
savings to reduce selling, general and administrative expenses. These cost
savings included a reduction of work force in all areas of product operations,
tighter controls over expenditures and the continued reorganization of the call
center operation.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
Net loss for the six months ended June 30, 2002 increased $202,389, or 24%,
over the same six-month period in 2001 due to a decrease in gross profit margin
of $317,415, offset by a decrease in selling, general and administrative
expenses of $122,588.
16
Total revenues for the six months ended June 30, 2002 decreased $369,962,
or 30%, compared to the same six months ended June 30, 2001. This decrease was
the result of a reduction in sales from our fast-food headsets and our decision
to exit the radio reseller market.
Revenue from our fast-food headsets decreased approximately $323,000 due to
reduced purchases by three of our major distributors. This decrease was
primarily the result of slowed demand from their customer base. In addition, a
portion of this decrease was related to a component failure issue that we
experienced with one of our suppliers during the second quarter of 2001.
Although this component issue has been resolved, we continue to honor our
customer agreements by replacing headsets, therefore resulting in fewer new
sales to these customers. It is anticipated that the replacement of these units
will be completed by the end of the second quarter 2002.
For the six months ended June 30, 2002, cost of goods sold decreased
$52,547, or 12%, compared to the same six-month period in 2001. This decrease
was due mainly to the decrease in sales volume for 2002, offset by additional
costs incurred to replace headsets mentioned above.
Gross profit margin for the three months ended June 30, 2002 was $509,196,
or 58%, as compared to $826,611, or 66% for the six months ended June 30, 2001.
This decline was a result of an increase in production costs due to the increase
in domestic production to facilitate smaller production runs, along with the
additional cost effect of replacing headsets, as mentioned above.
For the six months ended June 30, 2002, selling, general and administrative
expenses decreased $122,588, or 7%, compared to the same six-month period in
2001. In the first quarter 2002, Pro Tech implemented cost savings to reduce
selling, general and administrative expenses. These cost savings included a
reduction of work force in all areas of the products operations, tighter
controls over expenditures and the continued reorganization of the call center
operation.
Liquidity and Capital Resources
The current ratio (current assets to current liabilities) was .53 to 1.00
at June 30, 2002, as compared to .79 to 1.00 at December 31, 2001. At June 30,
2002, current liabilities exceeded current assets by $841,888.
During the three months ended June 30, 2002, we funded working capital
requirements with cash flows from operations and advances from NCT Group, Inc.
(our ultimate parent company) and its affiliates. We had negative working
capital of $841,888 at June 30, 2002, including the amount due to NCT and other
affiliated companies of $877,267. We have taken steps to reduce our working
capital requirements. These steps include the reorganization of the call center
operations, the reduction of work force levels in all areas of product
operations, and the institution of tighter controls over all expenditures.
As a result of the reorganization and reductions of work force, management
believes we will have sufficient funds to meet anticipated working capital
requirements for the next 12
17
months, provided NCT and other affiliated companies do not require immediate
payment on the amounts outstanding to them (see Note 8. Other Liabilities).
At June 30, 2002, cash and cash equivalents were $57,526, of which
approximately $22,000 was invested in interest-bearing money market accounts.
Working capital deficit increased to $841,888 at June 30, 2002, from
$329,136 at December 31, 2001. This $512,752 increase was due mainly to the
combination of a $231,290 decrease in inventories and a $296,199 increase in
other liabilities which included an increase of approximately $321,000 in
amounts due to NCT and its subsidiaries for direct and allocated expenses.
As of June 30, 2002, Pro Tech was in default on the $176,584 note payable
to Westek Electronics, Inc. (included in Notes payable) plus accrued interest of
$3,783 (included in Accrued expenses). Pro Tech is in discussions with the
holder to extend the due date of the note. If the note is not extended, the
holder may start litigation proceedings for payment.
For the six months ended June 30, 2002, the net cash provided by operating
activities was $17,111 compared to net cash used in operating activities of
$160,023 for the six months ended June 30, 2001. This switch to net cash
provided by operations was due primarily to the $296,199 increase in other
liabilities, mainly amounts due to NCT and its subsidiaries, as well as the
$231,290 decrease in inventories.
For the six months ended June 30, 2002, the net cash used in investing
activities decreased by $507,807, or 100%, compared to the same six-month period
in 2001. Pro Tech did not invest cash in capital items during the six months
ended June 30, 2002.
The company has no lines of credit with banks or other lending
institutions.
Capital expenditures
There were no material commitments for capital expenditures as of June 30,
2002, and no material commitments are anticipated in the near future.
18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Our annual meeting of stockholders was held on April 12, 2002. Through an
action by written consent of the majority shareholder of Pro Tech
Communications, Inc. (NCT Hearing Products, Inc.), the following resolutions
were adopted:
(a) Keith Larkin, Richard Hennessey, Michael J. Parrella, Irene Lebovics and Cy
E. Hammond be elected directors, each to serve until the next annual
meeting of stockholders and until his/her successor is elected and
qualified;
(b) The Articles of Incorporation of the Company be amended to increase the
number of shares of common stock, par value $.001 per share, that the
Company is authorized to issue from 40,000,000 to 300,000,000; and
(c) The 1998 Stock Option Plan of the Company be amended to increase the number
of shares of common stock available for issuance under the Plan from
2,000,000 to 30,000,000.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10(a) *Stock Option Agreement, dated February 1, 2002, between the Company
and Keith Larkin, incorporated herein by reference to exhibit 10(a) of
Pro Tech's Form 10-Q filed on May 13, 2002.
99(a) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -------------------------
* Denotes a management contract or compensatory plan or arrangement.
(b) Form 8-K
On June 7, 2002, the company filed a report on Form 8-K, dated June 4, 2002
announcing a change in independent accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pro Tech Communications, Inc.
Registrant
By: /s/ RICHARD HENNESSEY
--------------------------
Richard Hennessey
President
By: /s/ DEBRA KIRVEN
--------------------------
Debra Kirven
Chief Financial Officer
Dated: August 7, 2002
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