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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 June 30, 2003
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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4492 Okeechobee Rd Fort Pierce, FL 34947
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(772) 464-5100
- --------------------------------------------------------------------------------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). / / Yes /X/ 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 7, 2003
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
December 31, June 30,
2002 2003
-------------------- --------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 13,624 $ 11,835
Accounts receivable, less allowance for doubtful
accounts of $27,309 and $30,420, respectively 160,961 98,838
Inventories, net (Note 5) 592,536 517,752
Due from officers and employees 63,113 64,567
Other current assets 16,760 20,334
-------------------- --------------------
Total current assets 846,994 713,326
Property and equipment, net (Note 6) 601,183 525,487
Intangible assets, net 2,710,815 2,620,454
Other assets 4,500 5,167
-------------------- --------------------
$ 4,163,492 $ 3,864,434
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 426,976 $ 225,628
Accrued expenses (Note 7) 222,980 215,891
Current portion of capital lease obligations 9,662 9,943
Due to factor (Note 8) 34,165 2,372
Notes payable (Note 9) 172,754 158,699
-------------------- --------------------
Total current liabilities 866,537 612,533
Noncurrent notes payable (Note 14) 1,071,164 1,518,094
Capital lease obligations 31,767 26,675
-------------------- --------------------
Total liabilities 1,969,468 2,157,302
-------------------- --------------------
Series B redeemable convertible preferred stock, $.01 par value,
$1,000 stated value, 500 shares authorized, issued and outstanding (Note 10) 653,438 -
-------------------- --------------------
Stockholders' equity (Notes 10, 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 54,521 55,512
Series B redeemable convertible preferred stock, $.01 par value,
$1,000 stated value, 500 shares authorized, issued and outstanding - 538,358
Common stock, $.001 par value, authorized 300,000,000 shares,
issued and outstanding 33,200,311 shares 33,200 33,200
Additional paid-in-capital 18,451,079 18,565,168
Accumulated deficit (16,998,214) (17,485,106)
-------------------- --------------------
Total stockholders' equity 1,540,586 1,707,132
-------------------- --------------------
$ 4,163,492 $ 3,864,434
==================== ====================
The accompanying notes are an integral part of the condensed financial
statements.
2
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- ---------------------------
2002 2003 2002 2003
------------ ------------ ------------- ------------
Net sales $ 439,212 $ 258,142 $ 883,008 $ 611,679
Cost of goods sold 197,440 65,368 373,812 189,899
------------ ------------ ------------- ------------
Gross profit 241,772 192,774 509,196 421,780
Selling, general and administrative 732,437 404,726 1,550,635 872,235
------------ ------------ ------------- ------------
Loss from operations (490,665) (211,952) (1,041,439) (450,455)
Other income/(expense):
Interest income 839 730 1,624 1,453
Interest expense (13,002) (23,149) (19,663) (41,512)
Other 3,603 (31) 4,120 3,622
------------ ------------ ------------- ------------
Net loss (499,225) (234,402) (1,055,358) (486,892)
Adjustments attributable to preferred stock (Notes 10, 11 and 12):
Preferred stock beneficial conversion feature 15,582 - 40,844 -
Preferred stock dividend 5,485 5,485 10,911 10,911
------------ ------------ ------------- ------------
Net loss attributable to common stockholders $ (520,292) $ (239,887) $ (1,107,113) $ (497,803)
============ ============ ============= ============
Basic and diluted loss per share $ (0.02) $ (0.01) $ (0.03) $ (0.02)
============ ============ ============= ============
Weighted average common shares outstanding - basic and diluted 33,200,311 33,200,311 33,200,311 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,
--------------------------------------
2002 2003
----------------- -----------------
Cash flows from operating activities:
Net loss $ (1,055,358) $ (486,892)
Adjustments to reconcile net loss to net
cash provided by/(used in) operating activities:
Provision for doubtful accounts 26,103 3,111
Provision for obsolete inventory - (5,000)
Depreciation and amortization 548,094 169,895
Note payable issued for services received - 230,976
Changes in operating assets and liabilities:
Decrease in accounts receivable 32,796 59,012
Decrease in inventories 231,290 79,784
Increase in other assets (7,948) (5,704)
Decrease in accounts payable (66,198) (201,348)
Increase/(decrease) in accrued expenses 11,004 (6,090)
Increase/(decrease) in due to factor and other liabilities 296,199 (31,793)
----------------- -----------------
Net cash provided by/(used in) operating activities $ 15,982 $ (194,049)
----------------- -----------------
Cash flows from investing activities:
Net change in due from officer/stockholder and employees $ 1,129 $ (1,454)
Capital expenditures - (2,375)
----------------- -----------------
Net cash provided by/(used in) investing activities $ 1,129 $ (3,829)
----------------- -----------------
Cash flows from financing activities:
Proceeds from:
Notes payable $ - $ 217,000
Payments made on:
Notes payable - (16,100)
Capital lease obligations (6,466) (4,811)
----------------- -----------------
Net cash (used in)/provided by financing activities $ (6,466) $ 196,089
----------------- -----------------
Net increase/(decrease) in cash and cash equivalents $ 10,645 $ (1,789)
Cash and cash equivalents - beginning of period 46,881 13,624
----------------- -----------------
Cash and cash equivalents - end of period $ 57,526 $ 11,835
================= =================
Supplemental disclosures of cash flow information:
Cash paid during the six months ended for:
Interest $ 5,540 $ 14,746
================= =================
Supplemental disclosures of non-cash investing and financing activities:
Pro Tech adjusted the carrying value of preferred stock and additional paid-in
capital by $10,911 for the six months ended June 30, 2002 and
2003, 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, 2003
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation:
Throughout this document, Pro Tech Communications, Inc. is referred to as
"we," "our," 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 accounting principles generally accepted in
the United States of America applicable to interim periods. The results of
operations for the three and six months ended June 30, 2003 and cash flows for
the six months ended June 30, 2003 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, 2002.
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 May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." SFAS No. 150 establishes standards for how a
company classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The provisions of SFAS 150 are
effective for financial instruments entered into or modified after May 31, 2003
and to all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. Pro Tech will adopt
SFAS 150 as required in the third quarter of fiscal 2003 and is currently
evaluating the impact on our financial statements.
4. Stock Options:
Pro Tech has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based
5
Compensation - Transition and Disclosure an amendment to FASB Statement No.
123," and continues to apply Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for our stock-based compensation plans.
No options were issued to officers and employees during the three or six
months ended June 30, 2003. No compensation expense was recorded during the
three or six months ended June 30, 2002 for the options issued to officers and
employees, in accordance with APB No. 25. Had compensation expense been
determined on the fair value at the date of grant in accordance with SFAS No.
123, the net loss and loss per share attributable to common shareholders would
have been adjusted to the pro forma amounts indicated below:
For the three months ended For the six months ended
June 30, June 30,
--------------------------------- -------------------------------
2002 2003 2002 2003
-------------- ---------------- --------------- -------------
Net loss attributable to common
stockholders, as reported $ (520,292) $ (239,887) $(1,107,113) $ (497,803)
Stock-based employee costs based on fair
value method, net of related taxes 2,290 359 (18,148) (1,812)
-------------- ---------------- --------------- -------------
Net loss attributable to common
stockholders, pro forma $ (518,002) $ (239,528) $(1,125,261) $ (499,615)
============== ================ =============== =============
Basic and diluted loss per common share:
As reported $ (0.02) $ (0.01) $ (0.03) $ (0.02)
============== ================ =============== =============
Pro forma $ (0.02) $ (0.01) $ (0.03) $ (0.02)
============== ================ =============== =============
5. Inventories, net:
Inventories, net consisted of the following:
December 31, June 30,
2002 2003
----------------- -----------------
Finished goods $ 379,089 $ 338,653
Raw materials 196,330 161,782
Work in progress 27,117 22,317
----------------- -----------------
Gross inventories 602,536 522,752
Less: reserve for obsolete inventory 10,000 5,000
----------------- -----------------
Total Inventories, net $ 592,536 $ 517,752
================= =================
6
6. Property and Equipment, net:
Property and equipment, net consisted of the following:
December 31, June 30,
2002 2003
----------------- -----------------
Production molds $ 454,076 $ 455,440
Office equipment 146,556 147,567
Production equipment 39,514 39,514
Leased equipment 83,188 83,188
Leasehold improvements 315,050 315,050
Vehicles 12,414 12,414
Marketing displays 16,160 16,160
----------------- -----------------
Total cost 1,066,958 1,069,333
Less accumulated depreciation
and amortization 465,775 543,846
----------------- -----------------
Total Property and equipment, net $ 601,183 $ 525,487
================= =================
Depreciation expense for the six months ended June 30, 2002 and 2003 was
$81,815 and $78,071, respectively.
7. Accrued Expenses:
Accrued expenses consisted of the following:
December 31, June 30,
2002 2003
----------------- -----------------
Accrued warranty expense $ 69,486 $ 54,690
Accrued payroll and related expenses 98,718 101,004
Accrued vacation 16,397 17,073
Accrued lease payable 18,881 18,342
Other accrued expenses 19,498 24,782
----------------- -----------------
Total Accrued expenses $ 222,980 $ 215,891
================= =================
7
8. Due to Factor:
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 3.5% over the prime rate on the amount advanced under
the factoring agreement. The prime rate was 4.00% at June 30, 2003. In addition,
at June 30, 2003 we had $920 in reserve at the factor representing not less than
15% of the aggregate unpaid gross amount of all accounts factored under this
factoring agreement. If the net amount of accounts submitted for any one month
does not exceed $100,000, the factor may charge an additional commitment fee, as
described in the agreement. As of June 30, 2003, no such fees were required.
Such factored receivables are subject to acceptance by the factor. The factor
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, 2003, accounts receivable factored under this agreement and
still outstanding were $3,292, of which $2,372 had been received under the
factoring agreement under the recourse provisions. Total fees incurred under
this arrangement amounted to $1,592 and $720 during the three months ended June
30, 2002 and 2003, respectively; $3,425 and $2,821 during the six months ended
June 30, 2002 and 2003, respectively. Interest expense incurred under this
arrangement amounted to $727 and $604 during the three months ended June 30,
2002 and 2003, respectively; $1,540 and $1,583 during the six months ended June
30, 2002 and 2003, respectively.
9. Notes Payable:
Pro Tech successfully renegotiated its note payable with Westek
Electronics, Inc., which was due on June 27, 2003. The new $159,938 note dated
June 27, 2003, represented principal of $158,938 plus accrued interest of $1,000
from the matured note. The new note has interest at 8.5% and payment terms of
$3,500 due on the last day of each month starting on June 30, 2003 through May
31, 2004; with the remaining balance due on June 27, 2004. The balance of this
note outstanding as of June 30, 2003 was $156,549.
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. 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. 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, dividends on the
Preferred
8
Stock-B were $4,987 and $9,920 for the three and six-month periods ended June
30, 2003, respectively.
As of December 31, 2002, we classified the Preferred Stock-B as temporary
equity rather than stockholders' equity because, as of December 31, 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 applied and
mandated treatment of the shares as temporary equity. On April 10, 2003, Pro
Tech entered into an agreement with the holder of the Preferred Stock-B whereby
the holder agreed to waive certain requirements of the Registration Rights
Agreement relating to the Preferred Stock-B. This waiver released Pro Tech from
the requirement to register shares of Pro Tech's common stock for the conversion
of the Preferred Stock-B. This cancelled the triggering event, which had placed
the redemption of the Preferred Stock-B at the holder's option. With the signing
of this agreement, such redemption is now within the control of Pro Tech. At
June 30, 2003, the Preferred Stock-B is classified within the stockholders'
equity section of the balance sheet.
As of December 31, 2002, the Preferred Stock-B was carried on our balance
sheet at $653,438, which represented 125% of the stated value of the shares;
plus the accrued dividends of $28,438. Per the Preferred Stock-B agreement, the
Preferred Stock-B was redeemable at 125% of stated value due to the triggering
event mentioned above. As discussed above, the agreement dated April 10, 2003
cancelled this triggering event; therefore, we are no longer required to carry
the Preferred Stock-B at 125% of the stated value. The Preferred Stock-B is
carried on our balance sheet as of June 30, 2003 at $538,358, the redemption
value, which is comprised of the stated value of $500,000; plus the accrued
dividends of $38,358.
As of June 30, 2003, none of the Preferred Stock-B had been converted into
Pro Tech common shares or exchanged into NCT Group, Inc. (our ultimate parent
company, referred to as "NCT") common shares.
11. Stockholders' Equity:
The changes in stockholders' equity during the six months ended June 30,
2003, were as follows:
9
Balance Dividend on Reverse Balance
at Preferred Redemption Net At
12/31/02 Stock Adjustment Loss 6/30/03
-------------- ------------ ----------- ------------- ------------------
Series A preferred stock: Shares 50 - - - 50
Amount $ 54,521 991 - - $ 55,512
Series B preferred stock: Shares 500 500
Amount $ 653,438 9,920 (125,000) - $ 538,358
Common stock: Shares 33,200,311 - - - 33,200,311
Amount $ 33,200 - - - $ 33,200
Additional paid-in capital: $ 18,451,079 (10,911) 125,000 - $ 18,565,168
Accumulated deficit: $(16,998,214) - - (486,892) $ (17,485,106)
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. 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 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. 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, dividends on the
Preferred Stock-A were $498 and $991 for the three and six-month periods ended
June 30, 2003, respectively.
During the six-month period ended June 30, 2003, 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 158 million at June 30, 2003. This reserve includes amounts
for the conversion of preferred stock and for the exercise of options and
warrants.
13. Business Divisions Results:
During 2001, management identified two new business divisions in which the
company is directing its focus. These two business divisions are: (i)
Telecommunications Systems Integration; and (ii) Call Center Operations. As of
June 30, 2003, neither of these divisions is deemed to be reportable segments in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Prior to establishment of these two new business
divisions, we were predominately in the design, development, manufacture and
10
marketing of lightweight telecommunications headsets, currently known as Product
Business. We evaluate division performance based on net sales and operating
income. Management does not track division data or evaluate division performance
on additional financial information. As such, there are no separately
identifiable division assets nor are there any separately identifiable
statements of operations data (below operating income). Pro Tech does not track
or assign assets to individual business divisions. Likewise, depreciation
expense and capital additions are also not tracked by business division.
No geographic information for revenues from external customers or for
long-lived assets is disclosed as our primary market and capital investments
were concentrated in the United States.
Business division data is as follows:
Division
-------------------------------------------------------------------
Telecom
Product Systems Call Center
Business Integration Operations Total
-------------------------------------------------------------------
For the three months ended June 30, 2003:
Sales to external customers $ 231,382 $ 26,760 $ - $ 258,142
Other revenue - other operating segments - - - -
Loss from operations (205,627) (3,323) (3,002) (211,952)
For the three months ended June 30, 2002:
Sales to external customers $ 406,855 $ 32,357 $ - $ 439,212
Other revenue - other operating segments - - - -
(Loss)/income from operations (464,723) 1,011 (26,953) (490,665)
For the six months ended June 30, 2003:
Sales to external customers $ 560,867 $ 50,812 $ - $ 611,679
Other revenue - other operating segments - - - -
Loss from operations (432,279) (11,736) (6,440) (450,455)
For the six months ended June 30, 2002:
Sales to external customers $ 817,708 $ 65,300 $ - $ 883,008
Other revenue - other operating segments - - - -
(Loss)/income from operations (1,006,473) 2,887 (37,853) (1,041,439)
Pro Tech is divided into the following three business divisions:
Product Business: 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.
11
Telecommunications Systems Integration: 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 providing
telecommunications systems integration support to the small office and the large
corporate call center clients.
Call Center Operations: During 2001, we launched the Call Center Operations
Business. We utilized customer relationship management technologies and
strategies in order to achieve business division objectives. As of December 21,
2001, we suspended operations in the Call Center Operations Business due to poor
performing contracts. We resumed limited operations during the third quarter of
2002.
14. Related Party Transactions:
During the three months ended June 30, 2002 and 2003, we recorded charges
from NCT of approximately $135,000 and $125,000, respectively (for health
benefits, labor and parent company allocations), which are included in Selling,
general and administrative expenses in our condensed statement of operations.
For the six months ended June 30, 2002 and 2003, these charges were
approximately $311,000 and $220,000, respectively. In addition, NCT provided
cash advances to Pro Tech in the amount of $20,000 and $217,000 for the three
and six-month period ended June 30, 2003, respectively.
On March 31, 2003, Pro Tech issued a promissory note to NCT Hearing
Products, Inc. ("NCT Hearing"), bearing interest at prime (4.00% at June 30,
2003) and due on April 1, 2004, for $291,312 in exchange for services provided
and cash advanced to Pro Tech by NCT and its subsidiaries during the three
months ended March 31, 2003.
On June 30, 2003, Pro Tech issued a promissory note to NCT Hearing, bearing
interest at prime (4.00% at June 30, 2003) and due on April 1, 2005 in the
amount of $1,512,679. This note was issued as consideration for the rollover of
$1,345,811 in principal of all outstanding notes payable by Pro Tech to NCT
Hearing (plus accrued interest of $35,900) as of June 30, 2003, plus $130,968
for services provided and cash advanced to Pro Tech by NCT and its subsidiaries
during the three months ended June 30, 2003. The following notes payable were
outstanding and rolled into the new note payable dated June 30, 2003:
Outstanding Accrued
Original issue date of note: Principal Interest Total
-------------- -------------- --------------
September 30, 2002 $ 906,232 $ 29,664 $ 935,896
December 31, 2002 148,267 3,146 151,413
March 31, 2003 291,312 3,090 294,402
-------------- -------------- --------------
Total rolled into new note payable $1,345,811 $ 35,900 $1,381,711
============== ============== ==============
As of December 31, 2002 and June 30, 2003, Pro Tech owed an aggregate of
$1,064,703 and $1,512,679, respectively, to NCT Hearing, which is included in
Noncurrent notes payable on our condensed balance sheet.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 2003
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 Divisions 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
13
policies have a significant impact on amounts reported in the financial
statements. A summary of those significant accounting policies can be found in
our 2002 Annual Report on Form 10-K, filed on March 31, 2003, 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.
14
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 June 30, 2003 compared to three months ended June 30, 2002
Net loss for the three months ended June 30, 2003 decreased approximately
$265,000, or 53%, compared to the same three-month period in 2002. This decrease
was due to the net effect of a reduction in selling, general and administrative
expenses of approximately $328,000, offset by a decrease of approximately
$49,000 in our gross profit.
Total revenue for the three months ended June 30, 2003 decreased
approximately $181,000, or 41%, compared to the same three months ended June 30,
2002. This decrease was due mainly to the reduction in sales to the fast-food
market. This reduction reflected a decrease in demand due primarily to a general
slowdown in the economy.
Revenue from the fast-food market decreased approximately $123,000 due to
reduced purchases by three of our major distributors. This decrease was
primarily the result of slowed demand from their customer base. Demand has
decreased and we expect it to remain slow for the remainder of the year as a
result of two factors: (1) the announced closures of several hundred McDonalds
franchises worldwide; and (2) increased market competition from far-east
competitors.
For the three months ended June 30, 2003, cost of goods sold decreased
approximately $132,000, or 67%, compared to the same three-month period in 2002.
This decrease was due mainly to the decrease in sales volume for 2003 when
compared to the same three months ended in 2002. In addition, replacement of
headsets in connection with a component failure that we experienced during the
second quarter of 2001 was completed as of September 30, 2002. The number of
units replaced through warranty during the three-month period ended June 30,
2003 decreased by approximately 2,300 compared to the same period in 2002,
representing approximately $17,000 in costs. During the three months ended June
30, 2003 we received a $15,000 credit from a vendor in settlement of disputed
charges from prior years.
Gross profit margin increased from 55.1% for the three months ended June
30, 2002 to 74.7% for the three months ended June 30, 2003. This increase was
the result of two factors mentioned above. First, we received a $15,000 credit
from a vendor in settlement of disputed charges from prior years. Second, we
completed the replacement of component failure headsets in September 2002 so
that these costs were not incurred during the three-month period ended June 30,
2003, but were incurred during the same period in 2002.
For the three months ended June 30, 2003, selling, general and
administrative expenses decreased approximately $328,000, or 45%, compared to
the same three-month period in 2002.
15
This decrease was due mainly to a decrease of approximately $187,000 in
amortization expense related to our intangible assets and a decrease of
approximately $77,000 in payroll and related employee medical benefit expenses.
Starting in the latter part of the first quarter 2002, Pro Tech implemented
changes to reduce selling, general and administrative expenses. These changes
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.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Net loss for the six months ended June 30, 2003 decreased approximately
$568,000, or 54%, compared to the same six-month period in 2002. This decrease
was due to the net effect of a reduction in selling, general and administrative
expenses of approximately $678,000, offset by a decrease of approximately
$87,000 in our gross profit.
Total revenue for the six months ended June 30, 2003 decreased
approximately $271,000, or 31%, compared to the same six months ended June 30,
2002. This decrease was due mainly to the reduction in sales to the fast-food
market. This reduction reflected a decrease in demand due primarily to a general
slowdown in the economy.
Revenue from the fast-food market decreased approximately $220,000 due to
reduced purchases by three of our major distributors. This decrease was
primarily the result of slowed demand from their customer base. Demand has
decreased and we expect it to remain slow for the remainder of the year as a
result of two factors: (1) the announced closures of several hundred McDonalds
franchises worldwide; and (2) increased market competition from far-east
competitors.
For the six months ended June 30, 2003, cost of goods sold decreased
approximately $184,000, or 49%, compared to the same three-month period in 2002.
This decrease was due mainly to the decrease in sales volume for 2003 when
compared to the same six months ended in 2002. In addition, replacement of
headsets in connection with a component failure that we experienced during the
second quarter of 2001 was completed as of September 30, 2002. The number of
units replaced through warranty during the six-month period ended June 30, 2003
decreased by approximately 4,800 compared to the same period in 2002,
representing approximately $35,000 in costs. During the six months ended June
30, 2003 we received a $15,000 credit from a vendor in settlement of disputed
charges from prior years.
Gross profit margin increased from 57.7% for the six months ended June 30,
2002 to 69.0% for the six months ended June 30, 2003. This increase was the
result of two factors mentioned above. First, we received a $15,000 credit from
a vendor in settlement of disputed charges from prior years. Second, we
completed the replacement of component failure headsets in September 2002 so
that these costs were not incurred during the six-month period ended June 30,
2003, but were incurred during the same period in 2002.
For the six months ended June 30, 2003, selling, general and administrative
expenses decreased approximately $678,000, or 44%, compared to the same
six-month period in 2002. This decrease was due mainly to a decrease of
approximately $374,000 in amortization expense
16
related to our intangible assets and a decrease of approximately $220,000 in
payroll and related employee medical benefit expenses. Starting in the latter
part of the first quarter 2002, Pro Tech implemented changes to reduce selling,
general and administrative expenses. These changes 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
During the six months ended June 30, 2003, we funded working capital
requirements with continued use of our short-term financing arrangement and
advances from NCT Group, Inc. (our ultimate parent company) and its affiliates.
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 the products 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 June 30, 2003, cash and cash equivalents were $11,835.
The current ratio (current assets to current liabilities) was 1.16 to 1.00
at June 30, 2003, as compared to .98 to 1.00 at December 31, 2002. At June 30,
2003 we had working capital of $100,792 compared to a working capital deficit of
$19,543 at December 31, 2002. This improvement of approximately $120,000 was due
mainly to the receipt of $217,000 from NCT in exchange for notes payable to NCT
Hearing during the six months ended June 30, 2003.
For the six months ended June 30, 2003, the net cash used in operating
activities was $194,049 compared to $15,982 net cash provided by operating
activities for the six months ended June 30, 2002. This increase in used funds
of approximately $210,000 was due primarily to the $201,000 decrease in accounts
payable.
For the six months ended June 30, 2003, the net cash provided by financing
activities was $196,089 compared to $6,466 net cash used in financing activities
for the six months ended June 30, 2002. This increase of approximately $203,000
was due to $217,000 received from NCT in exchange for notes payable to NCT
Hearing during the six months ended June 30, 2003.
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,
2003, and no material commitments are anticipated in the near future.
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
17
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.
18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10(a)Exchange Rights and Release Agreement dated April 10, 2003 among NCT
Group, Inc., Pro Tech Communications, Inc., Alpha Capital
Aktiengesellschaft, Austost Anstalt Schaan, Balmore, S.A. and Libra
Finance, S.A., incorporated herein by reference to Exhibit 10 (a) of
Pro Tech's Form 10-Q filed on May 14, 2003.
99 Certification of Form 10-Q for the quarterly period ended June 30,
2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Form 8-K.
On April 4, 2003, Pro Tech filed a report on Form 8-K announcing its
results of operations for the fiscal year ended December 31, 2002.
19
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 8, 2003
20
CERTIFICATION OF PRESIDENT (Principal 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: August 8, 2003 /s/ RICHARD HENNESSEY
---------------------
Richard Hennessey
President (Principal Executive Officer)
21
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: August 8, 2003 /s/ DEBRA KIRVEN
-----------------------
Debra Kirven
Chief Financial Officer
22