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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 September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-28602
Pro Tech Communications, Inc.
- --------------------------------------------------------------------------------
(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)
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(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 November 5, 2002
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
December 31, September 30,
2001 2002
--------------- ---------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 46,881 $ 19,785
Accounts receivable, less allowance for doubtful
accounts of $24,784 and $24,031, respectively 219,434 168,574
Inventories (Note 4) 945,744 620,351
Due from officers and employees 2,876 103
Other current assets (Note 6) 5,926 12,042
--------------- ---------------
Total current assets 1,220,861 820,855
Property and equipment, net (Note 5) 756,365 640,583
Intangible assets, net of accumulated amortization of $1,164,821
and $1,863,713, respectively (Note 3) 15,142,671 14,443,779
Note receivable from Chairman/Director 59,670 62,175
Other assets 5,353 3,157
--------------- ---------------
$ 17,184,920 $ 15,970,549
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 546,917 $ 406,895
Accrued expenses (Note 7) 199,526 201,519
Current portion of capital lease obligations 10,083 9,124
Other liabilities (Note 8) 620,172 73,460
Notes payable (Note 15) 173,299 186,466
--------------- ---------------
Total current liabilities 1,549,997 877,464
Noncurrent notes payable (Note 9) - 906,232
Capital lease obligations 36,021 34,820
--------------- ---------------
Total liabilities 1,586,018 1,818,516
Series B redeemable convertible preferred stock, $.01 par value,
$1,000 stated value, 500 shares authorized, issued and outstanding (Note 10) 633,438 648,398
Stockholders' equity (Notes 11 and 12):
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 54,016
Common stock, $.001 par value, authorized 40,000,000 and 300,000,000 shares, respectively;
issued and outstanding 33,200,311 shares 33,200 33,200
Additional paid-in-capital 18,473,079 18,456,623
Accumulated deficit (3,593,336) (5,040,204)
--------------- ---------------
Total stockholders' equity 14,965,464 13,503,635
--------------- ---------------
$ 17,184,920 $ 15,970,549
=============== ===============
The accompanying notes are an integral part of the condensed financial
statements.
2
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2001 2002 2001 2002
------------- -------------- ------------- --------------
Net sales $ 462,034 $ 407,357 $ 1,715,004 $ 1,290,365
Cost of goods sold 189,749 209,275 616,108 583,087
------------- -------------- ------------- --------------
Gross profit 272,285 198,082 1,098,896 707,278
Selling, general and administrative 996,678 576,337 2,669,901 2,126,972
------------- -------------- ------------- --------------
Loss from operations (724,393) (378,255) (1,571,005) (1,419,694)
Other income/(expense):
Interest income 1,655 753 3,738 2,377
Interest expense (7,236) (15,268) (16,313) (34,931)
Other miscellaneous 52 1,260 689 5,380
------------- -------------- ------------- --------------
Net loss (729,922) (391,510) (1,582,891) (1,446,868)
Adjustments attributable to preferred stock (Notes 10, 11 and 12):
Preferred stock beneficial conversion feature 105,229 4,966 105,229 45,810
Preferred stock dividend 4,046 5,544 18,439 16,455
------------- -------------- ------------- --------------
Net loss attributable to common stockholders $ (839,197) $ (402,020) $ (1,706,559) $ (1,509,133)
============= ============== ============= ==============
Basic and diluted loss per share $ (0.03) $ (0.01) $ (0.05) $ (0.05)
============= ============== ============= ==============
Weighted average common shares outstanding - basic and dilu 33,171,140 33,200,311 31,971,241 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 Nine Months Ended
September 30,
---------------------------------------
2001 2002
----------------- -----------------
Cash flows from operating activities:
Net loss $ (1,582,891) $ (1,446,868)
Adjustments to reconcile net loss to net
cash used in operating activities:
Note payable issued for services provided - 385,201
Provision for doubtful accounts - (753)
Depreciation and amortization 773,914 821,239
Gain on sale of fixed assets (350) -
Changes in operating assets and liabilities:
Decrease in accounts receivable 151,727 51,614
(Increase) decrease in inventories (276,673) 325,393
(Increase) decrease in receivable from officers and employee (8,211) 268
Increase in other assets (42,408) (4,447)
Increase (decrease) in accounts payable 79,975 (140,022)
Increase in accrued expenses 176,195 19,608
Increase (decrease) in other liabilities 194,399 (25,681)
----------------- -----------------
Net cash used in operating activities $ (534,323) $ (14,448)
----------------- -----------------
Cash flows from investing activities:
Capital expenditures $ (523,448) $ -
Proceeds on sale of fixed asset 350 -
----------------- -----------------
Net cash used in investing activities $ (523,098) $ -
----------------- -----------------
Cash flows from financing activities:
Proceeds from:
Issuance of preferred stock $ 500,000 $ -
Payments made on:
Issuance/conversion costs on preferred stock (88,338) -
Capital lease obligations and notes payable (4,031) (12,648)
----------------- -----------------
Net cash provided by (used in) financing activities $ 407,631 $ (12,648)
----------------- -----------------
Net decrease in cash and cash equivalents $ (649,790) $ (27,096)
Cash and cash equivalents - beginning of period 776,381 46,881
----------------- -----------------
Cash and cash equivalents - end of period $ 126,591 $ 19,785
================= =================
Supplemental disclosures of cash flow information:
Cash paid during the nine months ended for:
Interest $ - $ 17,030
================= =================
Supplemental disclosures of non-cash investing and financing activities:
Pro Tech adjusted the carrying value of preferred stock and additional paid-in
capital by $18,439 and $16,455 for the nine months ended September 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 nine
months ended September 30, 2002.
4
PRO TECH COMMUNICATIONS, INC.
SEPTEMBER 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 nine months
ended September 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 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 ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 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 No. 142, we are 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 No. 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
5
accordingly. Adoption of SFAS No. 141 did not have a significant impact on our
financial statements. Adoption of SFAS No. 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 No. 142 for
intangible assets with finite lives, the estimated future cash flows were
determined in accordance with SFAS No. 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
No. 142, we will continue to monitor activities associated with our intangible
asset for possible impairments.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds Statement No. 4, which required all gains
and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Upon
adoption of SFAS No. 145, companies will be required to apply the criteria in
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" in determining the
classification of gains and losses resulting from the extinguishments of debt.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We
believe adoption of SFAS No. 145 will have no material effect on our financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by SFAS No. 146 include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. We believe SFAS No. 146 will have no material effect on
our financial statements.
4. Inventories:
Inventories consisted of the following:
December 31, September 30,
2001 2002
----------------- -----------------
Finished goods $ 609,852 $ 402,298
Raw materials 273,202 188,483
Work in progress 62,690 29,570
----------------- -----------------
Total Inventories $ 945,744 $ 620,351
================= =================
6
5. Property and Equipment, net:
Property and equipment, net consisted of the following:
December 31, September 30,
2001 2002
----------------- -----------------
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
----------------- -----------------
Total cost 1,063,005 1,069,043
Less accumulated depreciation
and amortization 306,640 428,460
----------------- -----------------
Total Property and equipment, net $ 756,365 $ 640,583
================= =================
Depreciation expense for the nine months ended September 30, 2001 and 2002
was $75,021 and $121,820, respectively.
6. Other Current Assets:
Other current assets consisted of the following:
December 31, September 30,
2001 2002
---------------- -----------------
Prepaid inventory purchases $ - $ 5,978
Deposits on leased equipment 5,926 6,064
---------------- -----------------
Total Other current assets $ 5,926 $ 12,042
================= =================
7. Accrued Expenses:
Accrued expenses consisted of the following:
December 31, September 30,
2001 2002
----------------- -----------------
Accrued warranty expense $ 96,391 $ 74,058
Accrued payroll and related expenses 43,670 75,128
Accrued vacation 24,205 23,127
Accrued lease payable 14,565 18,072
Other accrued expenses 20,695 11,134
----------------- -----------------
Total Accrued expenses $ 199,526 $ 201,519
================= =================
7
8. Other Liabilities:
Other liabilities consisted of the following:
December 31, September 30,
2001 2002
----------------- -----------------
Due to NCT Group, Inc. $ 195,298 $ -
Due to NCT Hearing Products, Inc. 325,733 -
Due to NCT Europe 35,111 45,184
Due to Factor (see Note 13) 64,030 28,276
----------------- -----------------
Total Other liabilities $ 620,172 $ 73,460
================= =================
On September 30, 2002, the amounts due to NCT Group, Inc. (our ultimate
parent company) and NCT Hearing Products, Inc. were exchanged into a long-term
note payable. See Note 9 - Noncurrent Notes Payable.
9. Noncurrent Notes Payable:
On September 30, 2002, $906,232, representing the amount due to NCT Group,
Inc. ("NCT") and NCT Hearing Products, Inc. at September 30, 2002, was exchanged
into a promissory note due to NCT Hearing Products, Inc., bearing interest at
prime (4.75% at September 30, 2002), due on April 1, 2004.
10. 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 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. 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).
8
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 $5,041 and $14,961 for the three and nine-month periods
ended September 30, 2002, respectively.
We have classified the Preferred Stock-B as temporary equity rather than
stockholders' equity because, at September 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 September 30,
2002 at $648,398, the redemption value, which is comprised of 125% of the stated
value of $500,000; plus accrued dividends of $23,398.
As of September 30, 2002, none of the Preferred Stock-B had been converted
into Pro Tech common shares or exchanged into NCT common shares.
11. Stockholders' Equity:
The changes in stockholders' equity during the nine months ended September
30, 2002, were as follows:
Balance Exchange/ Dividend on Balance
at Conversion of Preferred Net At
12/31/01 Preferred Stock Stock Loss 9/30/02
------------- ---------------- ----------- ------------ -------------
Series A preferred stock: Shares 50 - 50
Amount $ 52,521 - 1,495 - $ 54,016
Common stock: Shares 33,200,311 - - - 33,200,311
Amount $ 33,200 - - - $ 33,200
Additional paid-in capital: $ 18,473,079 - (16,456) - $ 18,456,623
Accumulated deficit: $ (3,593,336) - - (1,446,868) $ (5,040,204)
12. 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
9
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.
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 $504 and $1,495 for the three and nine-month periods
ended September 30, 2002, respectively.
During the nine-month period ended September 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 56 million at September 30, 2002. This reserve includes
amounts for the conversion of preferred stock and for the exercise of options
and warrants.
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. Prior to this agreement, the
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.
10
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 was effective as of August 5, 2002, 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.
13. 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
September 30, 2002. In addition, at September 30, 2002 we had a "Reserve
Account" in the amount of $9,803 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 September 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.
11
At September 30, 2002, accounts receivable factored under this agreement
and still outstanding were $38,079, of which $28,276 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 $1,782 and $1,031, respectively, during the three months ended
September 30, 2002 and $5,207 and $2,571, respectively, during the nine months
ended September 30, 2002.
14. 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 September 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.
Business segment data is as follows:
Segment
--------------------------------------------------------------
Telecom
Product Systems Call Center Total
Business Integration Operations Segments
--------------------------------------------------------------
For the three months ended
September 30, 2002:
Sales to external customers $ 363,287 32,503 11,567 $ 407,357
Other revenue - other operating segments $ - - - $ -
Net (loss) income $ (386,319) (9,516) 4,325 $ (391,510)
For the three months ended
September 30, 2001:
Sales to external customers $ 440,130 24,525 (2,621) $ 462,034
Other revenue - other operating segments $ - - - $ -
Net (loss) income $ (619,728) (35,347) (74,847) $ (729,922)
12
Segment
--------------------------------------------------------------
Telecom
Product Systems Call Center Total
Business Integration Operations Segments
--------------------------------------------------------------
For the nine months ended September 30, 2002:
Sales to external customers $ 1,180,995 97,803 11,567 $ 1,290,365
Other revenue - other operating segments $ - - - $ -
Net (loss) income $(1,404,978) (7,317) (34,573) $(1,446,868)
For the nine months ended September 30, 2001:
Sales to external customers $ 1,645,739 61,886 7,379 $ 1,715,004
Other revenue - other operating segments $ - - - $ -
Net (loss) income $(1,453,487) (23,240) (106,164) $(1,582,891)
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 have resumed operations during the third
quarter of 2002.
15. Liquidity
Pro Tech has incurred recurring losses from operations since its inception,
aggregating approximately $5.0 million through September 30, 2002. These losses,
which include the cost for development of products for commercial use, have been
funded primarily from product sales,
13
the sale of common stock and convertible preferred stock and services provided
by NCT and its subsidiaries.
In addition, Pro Tech had negative working capital of $56,609 at September
30, 2002. 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 aforementioned steps 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.
Pro Tech successfully renegotiated its note payable to Westek Electronics,
Inc. The resulting $180,493 note payable has interest at 8.5% and payment terms
of $3,500 due on the last day of each month starting on August 31, 2002 through
May 31, 2003 with the remaining balance due on June 27, 2003.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SEPTEMBER 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 14. 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.
Critical Accounting Policies
Our condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. As
such, some accounting policies have a
15
significant impact on amounts reported in the financial statements. A summary of
those significant accounting policies can be found in our 2001 Annual Report on
Form 10-K, filed on March 13, 2002, in the Notes to the Financial Statements,
Note 1. In particular, judgment is used in areas such as determining the
allowance for doubtful accounts, adjustments to inventory valuations, asset
impairments and the accrual for warranty expense.
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.
16
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.
Results of Operations
Three months ended September 30, 2002 compared to three months ended September
30, 2001
Net loss for the three months ended September 30, 2002 decreased $338,412,
or 46%, from the same three-month period in 2001 due to a decrease in selling,
general and administrative expenses of $420,341, offset by a decrease in the
gross profit margin of $74,203.
Total revenues for the three months ended September 30, 2002 decreased
$54,677, or 12%, compared to the same three months ended September 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 $115,000 due to
reduced purchases by three of our major distributors. This decrease was
primarily the result of slowed demand from their customer base. The decreased
demand, along with an increase in competition, caused us to reduce sales prices
in our major fast-food headset categories. 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 continued to honor our customer agreements by
replacing headsets, therefore resulting in fewer new sales to these customers.
These replacement agreements were completed as of September 30, 2002.
For the three months ended September 30, 2002, cost of goods sold increased
$19,526, or 10%, compared to the same three-month period in 2001. This increase
was due mainly to the completion of replacement agreements mentioned above. We
worked with our customers and resolved the remaining open headset replacements
by September 30, 2002.
Gross profit margin for the three months ended September 30, 2002 was
$198,082, or 49%, as compared to $272,285, or 59% for the three months ended
September 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 September 30, 2002, selling, general and
administrative expenses decreased $420,341, or 42%, 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.
17
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
Net loss for the nine months ended September 30, 2002 decreased $136,023,
or 9%, from the same nine-month period in 2001 due to a decrease in gross profit
margin of $391,618, offset by a decrease in selling, general and administrative
expenses of $542,929.
Total revenues for the nine months ended September 30, 2002 decreased
$424,639, or 25%, compared to the same nine months ended September 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 $438,000 due to
reduced purchases by three of our major distributors. This decrease was
primarily the result of slowed demand from their customer base. The decreased
demand, along with an increase in competition, caused us to reduce sales prices
in our major fast-food headset categories. 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.
These replacement agreements were completed as of September 30, 2002.
For the nine months ended September 30, 2002, cost of goods sold decreased
$33,021, or 5%, compared to the same nine-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 nine months ended September 30, 2002 was
$707,278, or 55%, as compared to $1,098,896, or 64% for the nine months ended
September 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 nine months ended September 30, 2002, selling, general and
administrative expenses decreased $542,929, or 20%, compared to the same
nine-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 .94 to 1.00
at September 30, 2002, as compared to .79 to 1.00 at December 31, 2001. At
September 30, 2002, current liabilities exceeded current assets by $56,609.
During the nine months ended September 30, 2002, we funded working capital
requirements with cash flows from operations and advances from NCT Group, Inc.
(our ultimate
18
parent company) and its affiliates. We had negative working capital of $56,609
at September 30, 2002, including the amount due to an NCT affiliate of $45,184.
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 months.
At September 30, 2002, cash and cash equivalents were $19,785.
Working capital deficit decreased to $56,609 at September 30, 2002, from
$329,136 at December 31, 2001. This $272,527 decrease in negative working
capital was due mainly to the exchange of the amounts owed to NCT Group, Inc.
and NCT Hearing Products, Inc. to noncurrent liabilities in conjunction with the
signing of a secured promissory note due on April 1, 2004. See Note 8 - Other
Liabilities and Note 9 - Noncurrent Notes Payable for further details.
Offsetting this decrease in current liabilities was a decrease in inventories of
$325,393.
For the nine months ended September 30, 2002, the net cash used in
operating activities was $14,448 compared to $534,323 for the nine months ended
September 30, 2001. This $519,875 decrease was due primarily to the $325,393
decrease in inventories for the nine months ended September 30, 2002 compared to
the $276,673 increase in inventories for the nine months ended September 30,
2001.
For the nine months ended September 30, 2002, the net cash used in
investing activities decreased by $523,098, or 100%, compared to the same
nine-month period in 2001. Pro Tech did not invest cash in capital items during
the nine months ended September 30, 2002.
For the nine months ended September 30, 2002, the net cash used in
financing activities was $12,648 compared to a net cash provided by financing
activities of $407,631 for the same period in 2001. During the nine months ended
September 30, 2001, Pro Tech received approximately $500,000 from the issuance
of preferred stock. We did not issue any preferred stock during the nine months
ended September 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 September
30, 2002, and no material commitments are anticipated in the near future.
19
ITEM 4. CONTROLS AND PROCEDURES
Pro Tech management, including the President and the Chief Financial
Officer, conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14 within 90 days of the filing of
this report. Based on that evaluation, the President and the Chief Financial
Officer concluded that the disclosure controls and procedures are effective in
ensuring that all material information required to be filed in this quarterly
report has been made known to them in a timely fashion. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date the President and the Chief
Financial Officer completed their evaluation.
20
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 of Form 10-Q for the quarterly period ended June 30,
2002 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, incorporated by
reference to Exhibit 99 (a) of Pro Tech's Form 10-Q filed on August 7,
2002.
99(b)Certification of Form 10-Q for the quarterly period ended September
30, 2002 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.
21
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: November 8, 2002
22
CERTIFICATION OF PRESIDENT (Principle Executive Officer)
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard Hennessey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pro Tech
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002 /s/ RICHARD HENNESSEY
-------------------------------
Richard Hennessey
President (Principle Executive Officer)
23
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Debra Kirven, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pro Tech
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002 /s/ DEBRA KIRVEN
-------------------------------
Debra Kirven
Chief Financial Officer
24